Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



Form 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                    to


Commission file number 0-19654



VITESSE SEMICONDUCTOR CORPORATION(Exact name of Registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

77-0138960(I.R.S. Employer Identification No.)741 Calle Plano
Camarillo, California 93012(Address of principal executive offices, including zip code)


Registrant's
telephone number, including area code:(805) 388-3700



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o    No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 4, 2009 there
were 230,905,580 shares of the registrant's $0.01 par value common stock outstanding.



---





Table of Contents



VITESSE SEMICONDUCTOR CORPORATION        QUARTERLY REPORT ON FORM 10-Q  FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2009        TABLE OF CONTENTS



PART I. FINANCIAL INFORMATIONItem 1.

Financial StatementsUnaudited Consolidated Balance Sheets as of June 30, 2009 and September 30, 2008

3Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2009
and 2008

4Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2009 and
2008

5Notes to Unaudited Consolidated Financial Statements

6Item 2.

Management's Discussion and Analysis of Financial Condition and Results of
Operations

34Item 3.

Quantitative and Qualitative Disclosure About Market Risk

59Item 4.

Controls and Procedures

60PART II. OTHER INFORMATIONItem 1.

Legal Proceedings

62Item 1A.

Risk Factors

62Item 2.

Unregistered Sales of Equity and Use of Proceeds

73Item 3.

Defaults Upon Senior Securities

73Item 4.

Submission of Matters to a Vote by Shareholders

73Item 5.

Other Information

73Item 6.

Exhibits

74


2

---





Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1:    FINANCIAL STATEMENTS



VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED BALANCE SHEETS

June 30,
2009

September 30,
2008(in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents

$
51,422

$
36,722Accounts receivable, net


14,898


6,307Inventory


23,936


37,466Assets held for sale





3,164Restricted cash


395


592Prepaid expenses and other current assets


4,345


4,011Total current assets


94,996


88,262Property, plant and equipment, net


7,419


8,084Goodwill





191,418Other intangible assets, net


1,833


913Other assets


3,388


3,600$
107,636

$
292,277LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS'
(DEFICIT) EQUITYCurrent liabilities:Accounts payable

$
16,980

$
16,101Accrued expenses and other current liabilities


9,825


20,242Derivative liability


4,636


Deferred revenue


640


2,721Current portion of debt, net of discount of $437 at June 30, 2009


29,563


Convertible subordinated debt


96,710


Total current liabilities


158,354


39,064Other long-term liabilities:


1,703


1,564Long-term debt, net of discount of $577 at September 30, 2008


44


29,423Convertible subordinated debt





96,700Total liabilities


160,101


166,751Minority interest


166


165Commitments and contingenciesShareholders' (deficit) equity:Preferred stock, $0.01 par value. 10,000,000 shares authorized; none outstanding





Common stock, $0.01 par value. 500,000,000 shares authorized; 230,905,580 shares outstanding at June 30, 2009 and 226,205,580 at September 30,
2008


2,314


2,267Additional paid-in-capital


1,753,846


1,747,324Accumulated deficit


(1,808,791
)

(1,624,230
)Total shareholders' (deficit) equity


(52,631
)

125,361$
107,636

$
292,277


See
accompanying notes to consolidated financial statements.

3

---





Table of Contents



VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended June 30,

Nine months ended June 30,2009

2008

2009

2008(in thousands, except per share data)

(in thousands, except per share data)Product revenues

$
36,356

$
55,041

$
115,743

$
163,176Intellectual property revenues


8,250





13,250


Net revenues


44,606


55,041


128,993


163,176Costs and expenses:Cost of revenues


17,282


27,965


57,957


79,977Engineering, research and development


11,200


12,458


33,720


37,584Selling, general and administrative (including gain on sale of fixed assets of $3.2 million for the nine months ended June 30, 2008 and a gain on
the sale of building of $2.9 million for the nine months ended June 30, 2009)


11,412


14,570


31,761


37,758Accounting remediation & reconstruction expense & litigation costs


(13,206
)

2,067


(9,742
)

8,813Goodwill impairment








191,418


Amortization of intangible assets


362


310


1,068


2,204Costs and expenses


27,050


57,370


306,182


166,336Income (loss) from operations


17,556


(2,329
)

(177,189
)

(3,160
)Other (expense) income:Interest expense, net


(5,804
)

(1,112
)

(8,104
)

(2,706
)Other (expense) income, net


(38
)

3,513


58


4,236Other (expense) income, net


(5,842
)

2,401


(8,046
)

1,530Income tax (benefit) expense


(696
)

3


(600
)

(546
)Minority interests in earnings of consolidated subsidiary





(660
)

1


(660
)Income (loss) from continuing operations before discontinued operations


12,410


(591
)

(184,634
)

(1,744
)Discontinued operationsIncome from discontinued operations, net of tax of $901 and $997 and gain on sale of $21,509 for the three and nine months ended June 30, 2008,
respectively


71


1,703


71


8,101Net income (loss)

$
12,481

$
1,112

$
(184,563
)
$
6,357Income (Loss) per ShareIncome (loss) per share (basic and diluted):Continuing operations

$
0.05

$
0.00

$
(0.81
)
$
(0.01
)Discontinued operations


0.00


0.01


0.00


0.04Net income (loss) per share

$
0.05

$
0.01

$
(0.81
)
$
0.03Weighted average shares outstanding:Basic


230,906


223,556


229,098


223,556Diluted


231,735


223,556


229,098


223,556


See
accompanying notes to consolidated financial statements.

4

---





Table of Contents



VITESSE SEMICONDUCTOR CORPORATION        UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended June 30,2009

2008(in thousands)Cash flows from operating activities:Net (loss) income

$
(184,563
)
$
6,357Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:Depreciation and amortization


3,260


4,324Share-based compensation


2,381


3,091Fair value adjustment to premium put


4,636


Impairment of goodwill


191,418


Allowance for sales return reserve


(37
)

(60
)Amortization of debt issuance costs and debt discounts


566


565Gain on sale of Storage Products business





(21,509
)(Loss) gain on disposal of fixed assets


7


(3,152
)Gain on sale of Colorado building


(2,924
)

Forgiveness of interest





(497
)Minority interest in earnings of consolidated subsidary





660Realized gain on investments





(3,372
)Change in operating assets and liabilities:Accounts receivable


(8,554
)

1,595Inventory


13,530


(7,835
)Restricted cash


197


1,556Prepaids and other current assets


(566
)

2,391Accounts payable


880


4,419Accrued expenses and other liabilities


(5,898
)

(6,457
)Deferred revenue


(2,082
)

(9,264
)Net cash provided by (used in) operating activities


12,251


(27,188
)Cash flows from investing activities:Proceeds from sale of investments





6,073Restricted cash


17


(10
)Proceeds from sale of Colorado building


6,500


Transaction costs for sale of Colorado building


(547
)

Disposal of fixed assets





3,207Sale of Storage Products business





62,845Transaction costs for sale of Storage Products business





(1,636
)Capital expenditures


(1,540
)

(4,290
)Distribution to minority partners for sale of investments


1


Purchase of intangibles


(1,982
)

Net cash provided by investing activities


2,449


66,189Cash flows from financing activities:Repayment of debt





(59,471
)Proceeds from debt





29,250Debt issuance costs





(1,046
)Net cash used in financing activities





(31,267
)Net increase in cash


14,700


7,734Cash and cash equivalents at beginning of period


36,722


25,976Cash and cash equivalents at end of period

$
51,422

$
33,710


See accompanying notes to consolidated financial statements.

5

---





Table of Contents



VITESSE SEMICONDUCTOR CORPORATION        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS        June 30, 2009

Note 1. The Company and its Significant Accounting Policies

Description of Business

Vitesse Semiconductor Corporation ("Vitesse" or the "Company") is a leading supplier of high-performance integrated
circuits ("ICs") that are utilized primarily by manufacturers of networking systems for Carrier, Enterprise and Storage communications applications. Vitesse designs, develops and markets a diverse
portfolio of high-performance, cost-competitive semiconductor products. For more than 25 years, Vitesse has led the transition of new technologies in communications
networks.

Our
customers include leading communications and enterprise original equipment manufacturers ("OEMs") such as Alcatel Lucent, Ciena Corporation, Cisco Systems, Inc., IBM,
Telefonaktiebolaget
LM Ericsson, Fujitsu Limited, Hewlett- Packard Co., Hitachi, Ltd., Huawei Technologies Co., Ltd., H3C Technologies Co., Limited, Nortel Networks Corp., Nokia Siemens
Networks B.V., Tellabs, Inc., and ZTE Corporation.

We
have a worldwide presence. As of June 30, 2009, we operated four domestic design centers in the U.S., in California, Oregon, Massachusetts, and Texas, and four international
design centers in Taiwan, Denmark, Germany, and India.

Vitesse
was incorporated in the State of Delaware in 1987. Our principal offices are located at 741 Calle Plano, Camarillo, California, and our phone number is
(805) 388-3700. Our stock trades on the Pink Sheets under the ticker symbol VTSS.PK.

Fiscal Periods

The Company's fiscal year is October 1 through September 30. References made to the third quarters of fiscal 2009 and
fiscal 2008 relate to the quarters ended June 30, 2009 and 2008, respectively.

Basis of Presentation and Going Concern Uncertainty

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions to Securities and Exchange Commission ("SEC") Form 10-Q and Article 10 of SEC
Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these
financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2008, included in our Annual Report on
Form 10-K filed with the SEC on December 31, 2008.

The
consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary
to present fairly our consolidated financial position at June 30, 2009 and September 30, 2008, and the consolidated results of our operations for the three and nine months ended
June 30, 2009 and 2008 and our consolidated cash flows for the nine months ended June 30, 2009 and 2008. The results of operations for the three and nine months ended June 30,
2009 are not necessarily indicative of the results to be expected for future quarters or the full year.

The
Company has incurred net losses historically and has used cash in operating activities, and has an accumulated deficit of $1.8 billion as of June 30, 2009. The Company
also has significant contractual obligations related to its debt for the fiscal year 2009 and beyond. Management believes we have

6

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

sufficient
resources to fund our normal operations over the next three months, through at least September 30, 2009. However, holders of our 1.5% Convertible Subordinated Debentures due 2024
(the "2024 Debentures") have the right to require us to repurchase the 2024 Debentures on October 1, 2009 for 113.76% of the principal amount of the 2024 Debentures to be purchased. This 2009
repurchase right would result in an additional payment of $13.3 million on the $96.7 million outstanding 2024 Debentures. We currently do not have the resources to repay the principal
amount and related premium if the 2024 Debentures were put to the Company for repayment on October 1, 2009.

We
are working to either renegotiate the terms of or find a means to repay the 2024 Debentures. However, to date, we have not been able to renegotiate those terms or find a source of
financing to repurchase or refinance the 2024 Debentures. If we have insufficient cash to repurchase all of the 2024 Debentures tendered for repurchase, our failure to repurchase such 2024 Debentures
would likely result in an event of default under the 2024 Debentures and cause an event of default under our $30 million secured debt agreement, which in turn would likely result in an
acceleration of that debt as well. In November 2008, our Board of Directors formed a Strategic Development Committee (the "SDC") for the purpose of exploring strategic alternatives. In December 2008,
we hired a financial advisor to assist the SDC with its efforts and in 2009 we hired an additional financial advisor to advise and assist the SDC with potential strategies for restructuring the terms
of the 2024 Debentures. The SDC is continuing to explore strategic alternatives for repayment of the 2024 Debentures and strategies for restructuring the terms of the 2024 Debentures. There can be no
assurance that we will be successful in raising additional capital, entering into any strategic transaction or renegotiating or settling all or any part of the 2024 Debentures prior to
October 1, 2009. If we are unable to renegotiate or settle the 2024 Debentures, our business, financial condition and results of operations will likely be materially and adversely affected, as
a result of these circumstances there exists significant uncertainty about the Company's ability to continue as a going concern. The accompanying financial statements have been prepared on the basis
of the Company continuing as a going concern. No adjustments have been made to carrying value of the assets and liabilities that might result from the outcome of this uncertainty.

Subsequent Events

In May 2009, the FASB issued FAS No. 165, "Subsequent Events,"which establishes
general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. We have considered subsequent events for recognition or
disclosure through August 10, 2009, the date of issuance, in preparing the consolidated financial statements and notes thereto (SeeSubsequent Events).

Use of Estimates

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. We regularly evaluate
estimates and assumptions related to revenue recognition, allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, share-based

7

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

compensation,
premium put, goodwill and purchased intangible asset valuations and useful lives, and deferred income tax asset valuation allowances. These estimates and assumptions are based on current
facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. The actual results we experience may differ materially and adversely from our original estimates. To the extent there are
material differences between the estimates and the actual results, our future results of operations will be affected.

Foreign Currency Translation

The functional currency of our foreign subsidiaries is the United States dollar, however our foreign subsidiaries transact in local
currencies. Consequently, assets and liabilities are translated into United States dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange
rate prevailing during the period. Foreign currency transaction gains and losses are included in results of operations.

Concentrations of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents,
short-term and long-term investments and accounts receivable. Cash equivalents consist of demand deposits and money market funds maintained with several financial institutions.
Deposits held with
banks have exceeded the amount of insurance provided on such deposits. The Company maintains its cash in commercial accounts with high-credit quality financial institutions. Although the
financial institutions are considered creditworthy, balances with any one financial institution may exceed the Federal Deposit Insurance Corporation (the "FDIC") limit of $250,000. At June 30,
2009, the Company's cash balance exceeded the deposit insurance limits provided by the FDIC by $52,590,278. Cash balances held in foreign bank accounts are not insured by the FDIC, and at
June 30, 2009 these balances totaled $224,880. At June 30, 2009, the Company's foreign subsidiaries reflected $645,255, of cash on their financial statements, which is not insured by the
FDIC.

The
Company believes that the credit risk in its accounts receivable is mitigated by the Company's credit evaluation process and maintaining an allowance for anticipated losses. For the
quarter ended June 30, 2009, one customer accounted for more than 10% of our net revenues. Total sales to this customer were 13.5% and 8.9% for the three months ended June 30, 2009 and
June 30, 2008, respectively. For the nine months ended June 30, 2009 and June 30, 2008, sales to this customer were 12.2% and 7.8%, respectively.

The
Company currently purchases wafers from a limited number of vendors. Additionally, since we do not maintain manufacturing facilities, we depend upon close relationships with contract
manufacturers to assemble our products. We believe there are available to the Company other vendors who can provide the same quality wafers at competitive prices and other contract manufacturers that
can provide comparable services at competitive prices. We anticipate the continued use of a limited number of vendors and contract manufacturers in the near future.

8

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

Contingencies

We assess our exposure to loss contingencies, including environmental, legal, and income tax matters, and provide an accrual for an
exposure if it is judged to be probable and reasonably estimable. If the actual loss from a loss contingency differs from management's estimates, results of operations could be adjusted upward or
downward.

Warranty

The Company generally warrants its products against defects for one year from date of shipment. The sales reserve allowance includes a
provision for products under warranty, which is recorded against revenue when products are shipped. At each reporting period, the Company adjusts its reserve for warranty claims based on its actual
warranty claims experience as a percentage of revenue for the proceeding 12 months after shipment and also considers the impact of known operational issues that may have a greater impact than
historical trends.

Revenue Recognition

In accordance with SEC Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), as well as SAB No. 104, "Revenue Recognition" ("SAB 104"), we recognize product
revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or
determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the
terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete.

Vitesse
has a distribution network through which it sells most of its products. The Company recognizes revenue on a sell-through basis for all products sold through
distributors, utilizing information provided by the distributors. These distributors maintained inventory balances of $4.9 million and $9.6 million as of June 30, 2009 and
September 30, 2008, respectively, which are carried on the books of Vitesse, and are given business terms to return a portion of inventory and receive credits for changes in selling prices to
end customers and inventory obsolescence. At the time Vitesse ships inventory to the distributors, the magnitude of future returns and price adjustments is not known. Therefore, revenue recognition
for shipments to distributors does not occur until the distributors sell inventory to end customers, and the payments received from distributors for inventory shipped to them, in advance of the sale
of that inventory to an end-user is, therefore, shown as deferred revenue. Vitesse personnel are often involved in the sales from the distributors to end customers.

Revenues
from development contracts are recognized upon attainment of specific milestones established under customer contracts. Revenues from products deliverable under development
contracts, including design tools and prototype products, are recognized upon delivery. Costs related to development contracts are expensed as incurred.

At
June 30, 2009, approximately 2.8% of our inventory is consigned and located with a single customer. Consistent with our revenue recognition policy, we recognize revenue when
the customer

9

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

pulls
the inventory for use, that is when title passes to the customer and all revenue recognition criteria specified above are met.

In
accordance with SAB 104 in the licensing of technology and other intangibles, delivery does not occur for revenue recognition purposes until the license term begins. Revenues
should be recognized in a manner consistent with the nature of the transaction and related earnings process. Based on management's analysis of the license terms, and pursuant to the guidance in
SAB 104, revenue related to the licensing of the intellectual property ("IP") is deferred until delivery has occurred and final acceptance of the contracted deliverables was received from the
licensee.

On
December 28, 2007, the Company entered into an arrangement to license IP to a third-party. The contract is a perpetual, nonexclusive, non-transferable, irrevocable
license for specified IP. As part of the contract, we were granted a perpetual, nonexclusive, non-transferable, irrevocable license to improvements to the technology made by the licensee,
subject to certain limitations. Under the agreement, Vitesse received $15.0 million in license fees and royalties for the rights to certain products and technology. Of the fees and royalty
payments, $10.0 million in fees was received upon delivery and acceptance of the licensed technology. The remaining $5.0 million of fees was received upon the one-year
anniversary of the agreement. For a period of seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each commercial sale incorporating the licensed
products. Royalties will be accounted for when received. No royalties were received or recognized for the nine months ended June 30, 2009.

On
June 30, 2009, the Company entered into a Sale and Purchase Agreement (the "Agreement") and completed the sale, assignment and transfer of certain patents (the "Vitesse
Patents") from its IP portfolio for consideration of IP revenue of $8.25 million, payment was due and received on July 15, 2009. The Company incurred $1.8 million in brokers fees
related to the sale. The Company recorded the broker's fees in selling, general and administrative expense. The Vitesse Patents relate to the Company's non-core business, specifically its
network processing products. Under the Agreement, the Company shall retain a non-exclusive, revocable, non-assignable, non-divisible, worldwide,
fully-paid-up, royalty-free, perpetual right and license to the Vitesse Patents for the full life of such Vitesse Patents.

Sales Returns, Pricing Adjustments and Allowance for Doubtful Accounts

We record reductions to revenue for estimated product returns and pricing adjustments, such as rebates, in the same period that the
related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known
at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates. We currently do not have any existing or on-going rebate
programs or policies. We also maintain an allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the
collectability of accounts receivable on a monthly basis using a combination of factors, including whether any receivables will potentially be uncollectible. The Company includes any accounts
receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance. Management believes the allowance for doubtful accounts as of June 30, 2009 and September 30, 2008, is adequate. However, if
the financial condition

10

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

of
any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required. We record a reserve for estimated sales returns and allowances
in the same period as the related revenues are recognized. Sales returns typically occur for quality related issues and allowances are based on specific criteria such as rebate agreements. We base
these estimates on our historical experience or the specific identification of an event necessitating a reserve. To the extent actual sales returns or allowances differ from our estimates, our
operations may be affected. As of June 30, 2009 and September 30, 2008, our sales return reserve was $16,000 and $54,000, respectively.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less at the time of
acquisition. Due to their liquidity and their remaining time to maturity, the fair value of these investments approximates their carrying value.

Investments

We have an investment in the equity securities of a privately-held company where the quoted market price is not readily
available. We use the cost method, combined with other intrinsic information, to assess the fair value of the investment. If the carrying value is below the fair value of an investment at the end of
any period, the investment is considered for impairment. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a
decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. Our investment in the
equity securities of a privately-held company was $248,000 as of June 30, 2009 and September 30, 2008.

Financial Instruments

Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial
Instruments" ("SFAS 107"), defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing
parties.

Our
financial instruments include cash equivalents, short-term investments, restricted deposits, accounts receivable, long-term investments, accounts payable and
accrued expenses. These financial instruments are stated at their carrying values, which are reasonable estimates of their fair values.

Additionally,
our financial instruments include our 2024 Debentures and a $30 million senior note with Whitebox VSC, LTD. ("Whitebox") (See Note 5Debt).
We have estimated the fair value of the 2024 Debentures using a convertible bond valuation model within a lattice framework. The valuation model combined expected cash outflows with market-based
assumptions regarding risk-adjusted yields, stock price volatility, and recent price quotes and trading information regarding shares of our common stock into which the debentures are
convertible. The estimated fair value of the 2024 Debentures was $47.6 million and $36.5 million, as of June 30, 2009 and September 30, 2008, respectively.

Additionally,
we have identified a derivative embedded in the 2024 Debentures that is bifurcated and accounted for at fair value. We refer to this embedded derivative as the premium put
(See Note 5Debt for further discussion of the accounting and the basis for valuation). The fair value of

11

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

the
premium put was determined to be $4.6 million as of June 30, 2009 and no fair value as of September 30, 2008.

The
senior note with Whitebox is stated at carrying value, net of unamortized debt discount, which is a reasonable estimate of fair value.

Inventory

Inventory is stated at the lower of cost or market (net realizable value). Costs associated with the development of a new product are
charged to engineering, research and development expense as incurred, until the product is proven through testing and acceptance by the customer. At each balance sheet date, the Company evaluates its
ending inventory for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. Inventory is shown net of reserves of
$23.9 million and $37.5 million at June 30, 2009 and September 30, 2008, respectively.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation and amortization are provided using the straight-line
method over the assets' remaining estimated useful lives, ranging from three to five years, except for leasehold improvements, which are stated at cost and amortized over the shorter of the term of
the related lease or their estimated useful lives. Depreciation and amortization costs from continuing operations were $1.1 million for both quarters ended June 30, 2009 and 2008, and
$3.3 million and $4.3 million for the nine months ended June 30, 2009 and 2008, respectively.

Goodwill and Other Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible
and intangible assets acquired. We performed a two-step process at December 31, 2008 to determine: (i) whether the fair value of the Company exceeds the carrying value; and
(ii) to measure the amount of an impairment loss. In the first step, we identified changes in key factors indicating an impairment of the value of our goodwill. Notable indicators were
significantly depressed market conditions and industry trends, market capitalization below book value of equity and some downward revisions to our forecasts due to current economic conditions.
Continually changing market conditions make it difficult to project how long the current economic downturn may last. Declining market values have negatively impacted our asset and equity valuations,
which are a component of our goodwill impairment tests. Upon completion of the first step of the impairment test for the quarter ended December 31, 2008, we determined that additional
impairment analysis was required by SFAS No. 142 "Accounting for Goodwill and Other Intangible Assets" ("SFAS 142"). The second step of
the goodwill impairment test compared the implied fair value of our Company's goodwill with the carrying amount of that goodwill. Since the carrying amount of goodwill exceeded the implied fair value
of that goodwill, an impairment loss was recognized in an amount equal to that excess. The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in a
business combination. The fair value was determined through an analysis of: (i) the market capitalization; (ii) comparable public company valuations; and (iii) the future cash
flows expected to be generated by the Company. The calculated fair value was then allocated to individual

12

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

assets
and liabilities (including any unrecognized intangible assets) as if the Company had been acquired in a business combination and the fair value of the Company was the purchase price paid to
acquire the Company. In performing this allocation, the fair values of the assets and liabilities of the Company were calculated using generally accepted valuation methodologies, including analysis
of: (i) the future cash flows expected to be generated; (ii) the estimated market value; or (iii) the estimated cost to replace. Any variance in the assumptions used to value the
assets and liabilities could have had a significant impact on the estimated fair value of the assets and liabilities and, consequently, the amount of identified goodwill impairment. As a result of the
additional analyses performed, we recorded an impairment charge to fully write off our goodwill balance of $191.4 million for the quarter ended December 31, 2008.

Intangible
assets, other than goodwill, are amortized over their useful lives unless these lives are determined to be indefinite. Other intangible assets are carried at cost less
accumulated amortization. Amortization is computed over the useful lives of the respective assets, generally two to ten years.

Income Taxes

We account for income taxes pursuant to the provisions of SFAS No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. We
assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the
extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. The Company adopted the provisions
of the Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), and
an interpretation of SFAS 109, on October 1, 2007 and assessed the impact of FIN 48 on its financial statements and determined that no adjustment to retained earnings was
necessary.

Research and Development Costs

Research and development costs are expensed when incurred. Manufacturing costs associated with the development of a new fabrication
process or a new product are expensed until such times as these processes or products are proven through final testing and initial acceptance by the customer.

Computation of Net Income (Loss) per Share

In accordance with SFAS 128, "Earnings per Share" ("SFAS 128"), basic net
income and loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period.

For
periods in which we report income from operations, the weighted average number of shares used to calculate diluted income per share is inclusive of common stock equivalents from
unexercised stock options, restricted stock units, warrants and convertible debentures. Unexercised stock options, restricted stock units and warrants are considered to be common stock equivalents if,
using the treasury

13

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

stock
method, they are determined to be dilutive. The dilutive effect of the convertible debentures is determined using the if-converted method.

For
the quarter ended June 30, 2009, the potential common shares excluded from the diluted earnings per share computation were determined to be anti-dilutive in
accordance with SFAS 128. Under the treasury stock method, due to the decreasing fair market value of the Company's common stock, none of its stock options or warrants was considered to be
dilutive for the quarter ended June 30, 2009. Using the if-converted method, the Company determined that the convertible debentures did not have a dilutive effect on earnings for
the quarter.

For
the nine months ended June 30, 2009, the Company recorded a loss from operations and in accordance with SFAS 128, all outstanding potential common shares were excluded
from the diluted earnings per share computation, as their inclusion would be anti-dilutive.

For
periods in which the Company reports a loss from operations, diluted loss per share is calculated using only the weighted average number of shares outstanding during each of the
periods, as the inclusion of any common stock equivalents would be anti-dilutive.

Long-Lived Assets

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted operating cash flows expected to be generated by the asset, or fair market value. Assets held for sale are recorded at the lesser of fair value less costs to sell or carrying
value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As
required by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), we verified our
long-lived assets were not impaired as of the time of the goodwill impairment. There were no impairment charges in the three and nine months ended June 30, 2009 and 2008.

Short-Term Investments

Investments in two limited partnerships, Vitesse Venture Fund, L.P. and Vitesse Venture Fund II, L.P. are consolidated in
the accompanying consolidated financial statements in accordance with SFAS No. 94 "Consolidation of All Majority-Owned Subsidiaries,"
("SFAS 94"). The Company has recorded a liability for the limited partners' investments in the joint ventures under the caption "minority interest" in the accompanying consolidated balance
sheets.

Share-Based Compensation

The Company has in effect several stock plans under which incentive and non-qualified stock options have been granted to
employees, contractors and directors. These plans include the 2001 Stock Incentive Plan (the "2001 Plan"), the 1991 Stock Option Plan, the 1991 Directors' Stock Option Plan, and the 1999 International
Stock Option Plan. SFAS 123R "Share-Based Payments," ("SFAS 123R"), requires all share-based payments to employees, including grants of
employee stock options and

14

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

employee
stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values. SFAS 123R also requires the benefits of tax deductions in excess
of recognized compensation cost be reported as a financing cash flow, rather than operating cash flow, as required under previous literature.

SFAS 123R
requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of each award as of the date of grant or assumption
using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The
Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the Company's stock price. Although the Black-Scholes model meets the requirements of
SFAS 123R, the fair values generated by the model may not be indicative of the actual fair values of the Company's awards, as it does not consider other factors important to those share-based
payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

In
conjunction with the adoption of SFAS 123R, we elected to recognize compensation expense for all share-based awards granted after September 30, 2005 on a
straight-line basis over the requisite service period for the entire award. The amount of compensation cost recognized through the end of each reporting period is equal to the portion of
the grant-date value of the awards that have vested, or for partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite
services have been provided.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, "Business Combinations,"
("SFAS 141R"). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective
for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, SFAS 141R is applicable to the Company's accounting for business combinations closing on
or after October 1, 2009. We expect SFAS 141R will have an impact on our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the
nature, terms and size of the acquisitions we consummate after the effective date of October 1, 2009.

In
April 2009, the FASB issued FSP No. 141R-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies," (FSP 141R-1). FSP 141R-1 amends the provisions in Statement 141R for the initial recognition and measurement, subsequent
measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and
non-contractual contingencies, including the initial recognition and measurement criteria in Statement 141R and instead carries forward most of the provisions in SFAS 141 for
acquired contingencies. FSP 141R-1 is effective

15

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

for
contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. We expect FSP 141R-1 will have an impact on our consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the
nature, term and size of the acquired contingencies.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51" ("SFAS 160"). SFAS 160 addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We do not anticipate that the adoption of
SFAS 160 will have a material impact on our financial statements.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of FASB Statement
No. 133" ("SFAS 161"). SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities and is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008. We adopted SFAS 161 in the second quarter of fiscal 2009. Since SFAS 161 only required additional
disclosure, the adoption did not impact our consolidated financial position, results of operations or cash flows.

In
May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion(Including Partial Cash Settlement)" ("APB 14-1"). APB 14-1 requires us to
separately account for the liability and equity components of a convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in
subsequent periods. APB 14-1 requires us to retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis.
APB 14-1 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact that APB 14-1 will have on our financial
statements.

In
June 2008, the FASB ratified Emerging Issues Task Force ("EITF") Issue No. 07-5, "Determining Whether an Instrument (or an Embedded Feature)
Is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 provides that an entity should use a two step approach to evaluate whether
an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and the instrument's settlement provisions.
EITF 07-5 clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation.
EITF 07-5 is effective for the financial statements issued for fiscal years and interim periods within those fiscal years, beginning after December 15, 2008 and will be
applied to outstanding instruments as of the beginning of the fiscal year in which it is adopted. Upon adoption, a cumulative effect adjustment will be recorded, if necessary, based on amounts that
would have been recognized if this guidance had been applied from the issuance date of the affected instruments. We are currently determining the impact that EITF 07-05 will have on
our financial statements, if any.

16

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 1. The Company and its Significant Accounting Policies (Continued)

In
April 2009 the FASB issued three related Staff Positions: (i) FSP 157-4, "Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability have Significantly Decreased
and Identifying Transactions That Are Not Orderly," ("FSP 157-4"), (ii) SFAS 115-2 and SFAS 124-2,
"Recognition and Presentation of Other-Than-Temporary Impairments," ("FSP 115-2") and ("FSP 124-2"), and
(iii) SFAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," ("FSP 107")
and ("APB 28-1"), which will be effective for interim and annual periods ending after June 15, 2009. FSP 157-4 provides guidance on how to determine the fair
value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude
that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair
value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP 115-2 and FSP 124-2 modify the
requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and
ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of
instruments under the scope of SFAS 157 for both interim and annual periods. The adoption of this statement did not have an impact on our results of operation, financial position or cash flow.

In
May 2009, the FASB issued FAS No. 165, "Subsequent Events," ("FAS 165"). The purpose of FAS 165 is to establish
general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FAS 165 is effective for interim and annual
periods ending after June 15, 2009. We adopted this statement for our quarter ended June 30, 2009, and the adoption did not have an impact on our results of operations, financial
position or cash flows.

In
June 2009, the FASB issued FAS No. 168, "The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162" ("FAS 168"). FAS 168 establishes the FASB Standards Accounting Codification ("Codification") as the source of
authoritative U.S. GAAP recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The
Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. FAS 168 also replaces FASB Statement No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" given that once in effect, the Codification will carry the same level of authority. The Company does not anticipate that the adoption of this statement
will have a material impact on its consolidated financial statement footnote disclosures. FAS 168 is effective for financial statements issued for interim and annual periods ending after
September 15, 2009, which will be our year ending September 30, 2009. The adoption of this statement is not expected to have a material impact on our results of operations, financial
position or cash flows.

17

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 2. Supplemental Financial Information

Inventory

The following table presents the details of the Company's inventory:

June 30,
2009

September 30,
2008(in thousands)Inventory:Raw materials

$
1,713

$
3,067Work-in-process


9,218


13,926Finished goods


13,005


20,473Total

$
23,936

$
37,466


Property, Plant and Equipment

The following table presents the details of the Company's property, plant and equipment:

June 30,
2009

September 30,
2008(in thousands)Property, Plant and Equipment:Machinery and equipment

$
90,010

$
90,493Furniture and fixtures


766


678Computer equipment


9,834


8,942Leasehold improvements


5,703


5,692Construction in progress


77


1,027106,390


106,832Less: Accumulated depreciation and amortization


(98,971
)

(98,748
)Total

$
7,419

$
8,084


18

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 2. Supplemental Financial Information (Continued)

Accrued Expenses and Other Current Liabilities

The following table presents the details of the Company's accrued expenses and other current liabilities:

June 30,
2009

September 30,
2008(in thousands)Accrued Expenses and Other Current Liabilities:Accrued legal fees and settlements

$
142

$
4,588Accrued wages, commissions and benefits


2,808


6,203Accrued vacation


2,801


2,720Accrued software license agreements


1,996


326Accrued income taxes


362


2,598Accrued expenses


227


1,675Accrued commissions


57


89Miscellaneous taxes


163


353Interest payable


901


1,270Customer prepayments and deposits


143


143Other


225


277Total

$
9,825

$
20,242


Net Revenues by Product Markets

The following table presents net revenues by product markets:

Three Months Ended June 30,

Nine Months Ended June 30,2009

2008

2009

2008(in thousands)Carrier Networking Products

$
16,689

$
22,596

$
51,582

$
68,051Enterprise Networking Products


14,960


19,841


43,987


56,702Non-Core Products


4,707


12,604


20,174


38,423Total Product Net Revenues

$
36,356

$
55,041

$
115,743

$
163,176


19

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 2. Supplemental Financial Information (Continued)

Intellectual Property Revenues

The following table presents intellectual property revenues by licensing:

Three
Months
Ended
June 30,

Nine
Months
Ended
June 30,2009

2008

2009

2008(in thousands)Intellectual Property Revenues

$
8,250

$


$
13,250

$



Net Revenues by Geographic Area

The following table presents net product revenues by geographic area:

Three Months Ended June 30,

Nine Months Ended June 30,2009

2008

2009

2008(in thousands)North America(1)

$
12,198

$
25,545

$
47,091

$
78,961Asia Pacific


20,507


23,167


49,534


65,574Europe


3,651


6,329


19,118


18,641Total Net Revenues

$
36,356

$
55,041

$
115,743

$
163,176


---

The
Company believes a substantial portion of the product sold to original equipment manufacturers ("OEMs") and third-party manufacturing service providers in the Asia Pacific region are
ultimately shipped to end-markets in North America and Europe.

20

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 2. Supplemental Financial Information (Continued)

Computation of Net Income (Loss) per Share

The following table presents the computation of income and loss per share:

Three Months Ended June 30,

Nine Months Ended June 30,2009

2008

2009

2008(in thousands, except per share data)

(in thousands, except
per share data)Income (loss) from continuing operations

$
12,410

$
(591
)
$
(184,634
)
$
(1,744
)Income from discontinued operations


71


1,703


71


8,101Net income (loss)

$
12,481

$
1,112

$
(184,563
)
$
6,357Weighted average number of shares (basic)


230,906


223,556


229,098


223,556Effect of dilutive common stock equivalents from restricted stock units


830








Weighted average number of shares (diluted)


231,735


223,556


229,098


223,556Income (loss) per share (basic and diluted):Continuing operations

$
0.05

$
0.00

$
(0.81
)
$
(0.01
)Discontinued operations


0.00


0.01


0.00


0.04Net income (loss)

$
0.05

$
0.01

$
(0.81
)
$
0.03


For
the three months ended June 30, 2009, the Company used the treasury stock method to determine the dilutive effect of outstanding stock options, restricted stock units and
warrants. Due to the decreasing fair market value of the Company's common stock, none of its stock options or warrants was considered to be dilutive for that period. Using the if-converted
method, the Company determined that the convertible debentures did not have a dilutive effect on earnings for the quarter.

For
the nine months ended June 30, 2009 and the three and nine months ended June 30, 2008, the Company reported a loss from operations. For periods in which the Company
reports a loss from operations, diluted loss per share is calculated using only the weighted average number of shares outstanding during each of the periods, as the inclusion of any common stock
equivalents would be anti-dilutive.

21

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 2. Supplemental Financial Information (Continued)

The
income and loss per share calculations do not include the effect of the following weighted average potential common shares:

Three Months Ended
June 30,

Nine Months Ended
June 30,2009

2008

2009

2008(in thousands)

(in thousands)Outstanding stock options


21,605


19,562


21,638


20,599Outstanding restricted stock units








351


Outstanding warrants


150


150


150


150Convertible debentures


37,981


37,981


37,981


37,981Total potential common shares excluded from calculation


59,736


57,693


60,120


58,730


Note 3. Goodwill

We account for goodwill and other intangible assets in accordance with SFAS 142. We evaluate these assets, including purchased intangible assets deemed to have indefinite lives,
on an annual basis in the fourth quarter or, more frequently, if we believe indicators of impairment exist. Factors we consider important that could trigger an impairment review include significant
underperformance to historical or projected operating results, substantial changes in our business strategy and significant negative industry or economic trends. If such indicators are present, we
compare the fair value of the goodwill to its carrying value. Fair value of goodwill is determined by using a valuation model based on an analysis of: (i) the Company's market capitalization;
(ii) comparable public company valuations (a market approach); and (iii) the future cash flows expected to be generated by the Company (an income approach). Fair value of other
intangible assets is determined by discounted future cash flows, appraisals or other methods. Carrying value of goodwill as of June 30, 2009 and September 30, 2008 was $0 and
$191.4 million, respectively. No activity or adjustments to goodwill except for the impairment charge for the quarter ended December 31, 2008 occurred for the periods ended
June 30, 2009 and September 30, 2008.

Other Intangible Assets

Other intangible assets consist primarily of existing technologies, customer relationships and covenants
"not-to-compete" acquired in past business combinations. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of
the assets. The carrying value of intangible assets at June 30, 2009 and September 30, 2008 was $1.8 million and $0.9 million, respectively. For other intangible assets and
long-lived assets, in accordance with SFAS 144, we determine whether the sum of the estimated undiscounted cash flows attributable to each asset in question is less than its
carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value of long-lived assets is
determined based on market value. If the long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the extent the fair value attributable to
the asset is less than the asset's carrying value. The fair value of the long-lived asset then becomes the asset's new carrying value, which we amortize over the remaining estimated useful
life of the asset.

22

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 4. Discontinued Operations and Assets Held for Sale

On October 29, 2007, the Company completed its sale of a portion of the Storage Products business to Maxim Integrated Products, Inc. ("Maxim") for $62.8 million,
with a gain on the sale of approximately $21.5 million, plus a potential earn-out based on the business meeting certain criteria, as detailed in the agreement. Maxim acquired the
Company's SAS/SATA expander product markets, enclosure and baseboard management devices, and certain other assets of the Storage Product business. Assets sold include inventory, property and
equipment, goodwill and intangible assets of $35.5 million. As part of the sale, Maxim assumed a liability for employees' accrued vacation of $300,000. The gain was reduced by costs of
completing the sale in the amount of $1.6 million.

Debt
issuance costs related to the Tennenbaum Capital Partners ("TCP") debt of $3.5 million were included in the calculation of the gain on the sale pursuant to the accounting
guidance in EITF Issue 87-24, "Allocation of Interest to Discontinued Operations" ("EITF 87-24") which requires any costs
related to financing that must be paid off with the proceeds of the sale of specific assets to be included in the determination of the gain or loss on sale. In accordance with
EITF 87-24 we have allocated to discontinued operations interest expense associated with debt instruments that were required to be repaid upon the sale of the Storage Product
business. Pursuant to an amendment to the debt agreement with TCP, we were required to pay the debt to TCP from the Storage Products division sale proceeds. Accordingly, for the nine months ended
June 30, 2008, interest expense of approximately $16.9 million was included in discontinued operations. The interest expense included a "make-whole" payment of
$16.4 million and interest expense and amortization of deferred financing fees of $0.5 million.

We
recorded amounts in discontinued operations in accordance with SFAS 144. Accordingly, we reported the results of operations of the Storage Products business in discontinued
operations within the Company's statement of operations for the nine months ended June 30, 2008. The sale of the Storage Products division closed on October 29, 2007.

On
December 22, 2008, we closed the sale of the Colorado land and building to a third-party. The gross sales price was $6.5 million. The facility was previously used for
the Storage Products business, which was discontinued and sold on October 29, 2007 and had remained unused since. As a result, the net book value of $3.2 million was reported as "Asset
Held for Sale" on the September 30, 2008 balance sheet. We recognized a gain of approximately $2.9 million on this sale in the first quarter of fiscal 2009.

Note 5. Debt

During 2004, the Company issued $96.7 million in aggregate principal amount of its 2024 Debentures to qualified institutional buyers in reliance on Rule 144A under the
Securities Act of 1933 (the "Securities Act"). The 2024 Debentures are unsecured obligations and are subordinated in right of payment to all of the Company's existing and future senior indebtedness.
Interest is payable in arrears semiannually on October 1 and April 1 of each year, beginning April 1, 2005. On August 15, 2006, the Company received notification from the
Trustee under the Indenture, dated as of September 22, 2004, relating to the Company's 2024 Debentures. The Trustee alleged compliance deficiencies under the Indenture relating to the Company's
failure to file with the Securities and Exchange Commission the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. Although the Company did not
believe there were compliance deficiencies under the Indenture, and that an Event of

23

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 5. Debt (Continued)

Default
did not occur, the Company negotiated with the holders of a majority of the 2024 Debentures to reach a resolution to the dispute. On September 24, 2007, the Company entered into a
Second Supplemental Indenture amending Section 1.1 of the Indenture related to the "Interest Rate"; Section 4.1(d) of the Indenture related to "Default" or "Event of Default"; and
Section 4.2 of the Indenture related to "Acceleration of Maturity." As part of the amendment, the Company agreed to increase the interest payable for the period starting April 1, 2007,
through, but not including October 1,
2007, by $20 per $1,000 principal amount of the 2024 Debentures. On October 1, 2007, the Company included an additional $1.9 million payment with the semiannual payment of interest due.

On
October 23, 2006, the Company solicited consents from the holders of the 2024 Debentures that, if received, would provide: (i) the holders of the 2024 Debentures and the
Trustee under the Indenture would agree that, for 18 months after the date the proposed amendments are effective, the Trustee would forbear from taking any action to exercise any rights or
remedies that relate to the filing of reports required under the Exchange Act; (ii) the Company would agree not to repay the 2024 Debentures pursuant to the purported acceleration request sent
by the Trustee to the Company during the last six months of the forbearance period; (iii) the indenture for the 2024 Debentures would be amended so that the conversion price of the 2024
Debentures would be decreased permanently from $3.92 per share of common stock to $2.546 per share of common stock, subject to further adjustment as set forth in the indenture; and (iv) the
repurchase price with respect to the October 1, 2009, repurchase right was increased from 100% to 113.76% of the principal amount of the 2024 Debentures to be purchased, plus accrued and unpaid
interest (the October 1, 2014 and October 1, 2019 repurchase rights would not be changed). The consents were received and the amendments became effective November 3, 2006.

In
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), embedded
derivatives must be bifurcated from the underlying debt instrument and valued as a separate financial instrument. Our 1.5% Convertible Subordinated Debentures due 2024 (the "2024 Debentures") includes
a repurchase right for 113.76% of the principal amount of the 2024 Debentures on October 1, 2009 (the "premium put") that we have identified as an embedded derivative requiring bifurcation and
accounting at fair value because the economic and risk characteristics of the premium put meet the criteria for separate accounting as set forth in SFAS 133. We estimate the approximate fair
value of the premium put as the difference between the estimated value of the 2024 Debentures with and without the premium put feature. The fair value of the 2024 Debentures, both with and without the
embedded premium put feature, was estimated using a convertible bond valuation model within a lattice framework. The valuation model combined expected cash outflows with market-based assumptions
regarding risk-adjusted yields, stock price volatility, and recent price quotes and trading information regarding shares of our common stock into which the 2024 Debentures are convertible.
Our analysis is premised on the assumption that the holder would act in a manner that maximizes the potential return, or "payoff", at any given point in time. Included in this premise is the
assumption that the holder would compare the potential return associated with each available alternative, including, as specified in the terms of the contract, holding the debt instrument, exercising
an equity conversion option, or exercising a put option. As a component of this, we incorporated a market participant consideration as to the Company's capacity to fulfill the contractual obligations
associated with each alternative, including the Company's ability to fulfill any cash settlement obligation associated with exercise of the put option. Based on our analysis, we determined

24

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 5. Debt (Continued)

that
the fair value of the premium put is most sensitive to the estimated amount of funds available for settlement of the liability on October 1, 2009. More specifically, fair value of the
premium put is positively correlated to the estimated amount of cash proceeds expected to be received at exercise. Should the premium put have value, any gain or loss on the fair value of the premium
put will be reflected in current earnings. The result of our valuation analysis was that premium put was estimated
to have $4.6 million fair value as of June 30, 2009 and no fair value as of September 30, 2008. The primary driver of the change in fair value between these dates was an increase
in the amount of funds available for cash settlement between the measurement dates.

The
modification of the conversion feature discussed above resulted in an increase in the initial conversion rate to approximately 392.773 shares of common stock per $1,000 principal
amount of the 2024 Debentures from approximately 255.102 shares of common stock per $1,000 principal amount of the debentures. Upon conversion, the Company will have the option to deliver cash in lieu
of shares of its common stock or a combination of cash and shares of common stock. The Company may redeem the 2024 Debentures after October 1, 2007 if its stock price is at least 170% of the
conversion price, or approximately $4.32 per share, for 20 trading days within any consecutive 30-day trading period, and may also redeem the 2024 Debentures beginning October 1,
2009, without being subject to such condition. Holders of the 2024 Debentures have the right to require the Company to repurchase the 2024 Debentures on October 1 of 2009, 2014, and 2019. The
Company has recorded the principal amount of the 2024 Debentures as a current liability.

In
accordance with the November 3, 2006 amendments to the 2024 Debentures, the October 1, 2009 repurchase right was increased from 100% to 113.76% of the principal amount
of the 2024 Debentures to be purchased. The increase in the repurchase right would result in an additional payment of $13.3 million on the $96.7 million outstanding 2024 Debentures.
Holders also have the option, subject to certain conditions, to require the Company to repurchase any 2024 Debentures held by such holder in the event of a fundamental change, at a price equal to 100%
of the principal amount of the 2024 Debentures plus accrued and unpaid interest plus, under certain circumstances, a make-whole premium. For the three months ended June 30, 2009 and
2008, interest expense relating to the 2024 Debentures was $0.4 million. For the nine months ended June 30, 2009 and 2008, interest expense relating to the 2024 Debentures was
$1.1 million. Outstanding 2024 Debentures were $96.7 million at June 30, 2009 and September 30, 2008.

On
October 29, 2007, we completed a $30.0 million financing with Whitebox, net of $0.8 million of debt discount. The loan has a four-year term.
Unamortized debt discount as of June 30, 2009 and September 30, 2008 was approximately $0.4 million and $0.6 million, respectively. In connection with securing the debt,
the Company paid approximately $2.3 million in fees that are recorded as debt issuance costs in Other Assets on the accompanying balance sheets. These fees are being amortized as interest
expense over the term of the loan. Unamortized debt issuance costs as of June 30, 2009 and September 30, 2008 were approximately $1.3 million and $1.8 million,
respectively. The annual interest rate on the unpaid principal is the greater of 8.5% or LIBOR plus 4% during the interest period ending on the interest date. The loan is secured by substantially all
of our assets. The Company and Whitebox also entered into a Senior Unsecured Convertible Note Purchase Agreement that gives Whitebox the right, until the third anniversary of the initial funding, to
purchase convertible notes in an aggregate principal amount of up to $30.0 million, which we would use to repay amounts outstanding

25

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 5. Debt (Continued)

under
the loan. These convertible notes, if issued, would be convertible into the common stock of Vitesse at a conversion price of $2.00 per share, subject to adjustment. At June 30, 2009 and
September 30, 2008, the effective interest rate on the loan was 10.6485% and 11.082%, respectively. For
the three and nine months ended June 30, 2009, interest expense was $0.6 million and $1.9 million, respectively. The agreement contains various restrictive covenants. As of
June 30, 2009, we were in compliance with the terms of the covenants. According to the terms of the Whitebox Agreement, under certain circumstances, repayment of the 2024 Debentures would
require that the Company to immediately pay to Whitebox the lesser of (A) the aggregate principal amount of the outstanding Whitebox debt, including accrued and unpaid interest and
(B) 25% of the aggregate amount of the 2024 Debentures redeemed. Prior to June 30, 2009, the Company was pursuing alternatives to refinance or raise funds to pay the convertible
subordinated debt that in management's judgment met the terms in the Whitebox debt agreement that did not require payment of the Whitebox debt simultaneously with the payment of the convertible
subordinated debt. As of June 30, 2009, management has concluded that the alternatives currently being pursued to generate funds to pay the convertible subordinated debt would not meet the
terms in the Whitebox debt agreement and accordingly has classified the Whitebox debt as current based on the anticipation that payment of all or a portion of the convertible subordinated debt
pursuant to the premium put would require simultaneous payment of all or a portion of the Whitebox debt.

Note 6. Income Taxes

The provision for income taxes as a percentage of income from continuing operations before income taxes was (5.84%) for the nine months ended June 30, 2009 compared to 16.6% for
the comparable period in the prior year. For the year ending September 30, 2009, the Company's estimated effective tax rate is (5.84%). The Company's effective tax rate for fiscal 2009 is
primarily impacted by the $191.4 million goodwill impairment recorded during the first quarter of 2009.

At
October 1, 2008, the Company had net deferred tax assets of $441.5 million before considering the effect of the valuation allowance. These deferred tax assets are
primarily composed of net operating loss ("NOL") carryforwards. The following table details the amount and expiration of the federal net operating loss carryforwards included in the
deferred tax asset (in thousands):

Gross Amount

Amount without Limitation

Year of expirationFederal net operating loss carryforwards

$
147,561

$
105,896


2020-2021337,040


206,258


2022-2023111,240


71,147


2024-202550,908


50,908


2026-2027Total federal net operating loss carryforwards

$
646,749

$
434,209


We
have available federal research and development tax credit carryforwards of approximately $13.8 million, net of a FIN 48 allowance. The following table details the
amount and expiration of the

26

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 6. Income Taxes (Continued)

federal
research and development tax credit carryforwards included in the deferred tax asset (in thousands):

Amount

Year of expirationFederal research and development credit carryforwards

$
2,029


2008-20125,497


2013-20194,400


2020-20211,848


2022-2025Total federal research and development credit carryforwards

$
13,774


Timing
differences included in the net deferred tax assets relate primarily to tangible and intangible assets recovery, other accruals and reserves. Due to uncertainties surrounding the
Company's ability to generate future taxable income to utilize the deferred tax assets, management has recorded a full valuation allowance against the deferred tax assets.

FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a
tax return. Due to significant net operating losses, the cumulative effect of applying this interpretation has no impact on retained earnings.

The
total amount of gross unrecognized tax benefits decreased by $70,000 for potential state tax liabilities. Included in the balance of unrecognized tax benefits of
$29.2 million, as of June 30, 2009, there were no unrecognized tax benefits that, if recognized, would impact the effective tax rate.

The
Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2009, no material interest or penalties were
accrued due to the existence of significant net operating losses which would offset any potential tax liabilities.

In
the event of a change in control of the ownership of the Company, the ability of the Company to use the NOL's and credits in future taxable periods may be impaired. A
change in control occurs whenever there is a shift in ownership by more than fifty percentage points by one or more five-percent shareholders within a three year period. Based on our
current analysis of changes in shareholder ownership, we believe that an ownership change has not occurred. Accordingly, we have not presented any amount as an uncertain tax position under
FIN 48. Any carryforwards that will expire prior to utilization will be removed from the deferred tax assets with a corresponding reduction in the valuation allowance.

The
Company is subject to taxation in the US and various state and foreign jurisdictions. The Company recently concluded an examination by the Internal Revenue Service for the tax years
ended September 30, 2004 through September 30, 2006. The audit resulted in an adjustment that reduced the Company's federal NOL carryforwards. Effectively, all of the Company's tax years
in which a tax NOL has been carried forward to the present are subject to examination by the federal, state, and foreign tax authorities. Therefore, the Company cannot estimate the range of
unrecognized tax benefits that may significantly change within the next twelve months because of the Internal Revenue Service examination.

27

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 7. Shareholders' Equity

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of non-voting convertible preferred stock, with a par value of
$0.01 per share, of which 500,000 were reserved for issuance under the Rights Plan, described below, and none were outstanding as of June 30, 2009 and September 30, 2008.

Rights Plan

Vitesse has a shareholder rights plan intended to preserve the long-term value of Vitesse to our shareholders by
discouraging a hostile takeover. Under the shareholder rights plan, each outstanding share of our common stock has an associated preferred stock purchase right. The rights are exercisable only if a
person or group acquires 15% or more of our outstanding common stock. If the rights become exercisable, the rights would allow their holders (other than the acquiring person or group) to purchase
fractional shares of our preferred stock, to purchase
the number of shares of common stock of Vitesse having a market value of twice the exercise price of the right, or to purchase the number of shares of common stock of the company acquiring us having a
market value of twice the exercise price of the right. The dilutive effect of the rights on the acquiring person or group is intended to encourage such person or group to negotiate with our Board of
Directors prior to attempting a takeover. If our Board of Directors believes a proposed acquisition of Vitesse is in the best interests of Vitesse and its shareholders, our Board of Directors may
amend the shareholder rights plan or redeem the rights for a nominal amount in order to permit the acquisition to be completed without interference from the plan.

Common Stock

The Company is authorized to issue up to 500,000,000 shares of common stock, with a par value of $0.01 per share, of which 230,905,580
shares and 226,205,580 shares were outstanding as of June 30, 2009 and September 30, 2008, respectively.

Share-Based Compensation Plans

The Company has in effect several share-based plans under which non-qualified and incentive stock options and restricted
stock awards have been granted to employees, consultants and outside directors. Options generally vest over three or four years and have contractual lives of 10 years. Restricted stock awards
generally vest over three or four years.

On
January 23, 2001, the Company's shareholders approved the adoption of the 2001 Stock Incentive Plan (the "2001 Plan"), which replaced the 1991 Stock Option Plan (the "1991
Plan") that expired in August 2001 and the 1991 Directors' Stock Option Plan that expired in January 2002. The 2001 Plan provides for the grant to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for the grant to employees, consultants and directors of non-qualified stock options and certain
share-based awards as determined by the Board of Directors or the Compensation Committee of the Board of Directors. The 2001 Plan was amended in September 2008 to, among other things; simplify the
criteria for determining the grant price of options granted under the plan.

Under
all stock option plans, a total of 82,091,418 shares of common stock have been reserved for issuance and 52,532,437 shares remained available for future grants as of
June 30, 2009.

28

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 7. Shareholders' Equity (Continued)

The
following table summarizes compensation costs related to the Company's share-based compensation plans (in thousands) for the periods ended June 30:

Three Months Ended June 30,

Nine Months
Ended
June 30,2009

2008

2009

2008Cost of revenues

$
169

$
203

$
528

$
690Research and development


242


282


678


1,016Selling, general and administrative


386


362


1,175


1,685Share-based compensation expense related to continuing operations


797


847


2,381


3,391Share-based compensation expense related to discontinued operations











(284
)Total share-based compensation expense

$
797

$
847

$
2,381

$
3,107


In
addition to the share-based compensation expense related to the Company's plans, we recorded $16,000 of share-based compensation expense during the nine months ended June 30,
2008 related to the employee stock appreciation rights. Pursuant to SFAS 123R, the stock appreciation rights are considered liability awards and as such, these amounts are accrued in the
liability section of the balance sheet.

The
fair value of stock option awards is estimated at the date of grant using the Black-Scholes option valuation model. Expected volatility is based on the historical volatilities of the
Company's common stock. The risk-free interest rate is based on the U.S. Treasury constant maturity rate for the expected life of the stock option. The expected life of a stock award is
the period of time that the award is expected to be outstanding. Expected lives were estimated based upon historical exercise data. The Company has never paid cash dividends and intends to retain any
future earnings for business development.

The
fair values of the Company's stock options granted in the periods ended June 30, 2009 and 2008 were calculated for expense recognition using an estimated forfeiture rate,
assuming no expected dividend, and using the following weighted average assumptions:

Nine Months Ended June 30,2009

2008Expected life (in years)


5.50-5.91


4.68Expected volatility


65.0%-84.6%


66.2
%Risk-free interest rate


1.79%-3.25%


4.1
%Weighted-average estimated fair value

$
0.23

$
0.58


The
Company's determination of the fair value of stock option awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables include,
but are not limited to, the Company's expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The fair value of employee stock
options is determined in accordance with SFAS 123R and SAB 107, using an option-pricing model, however, that

29

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 7. Shareholders' Equity (Continued)

value
may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise.

Activity
under all stock option plans during the nine-month period ended June 30, 2009 was as follows:

Shares

Weighted average exercise price

Weighted average remaining contractual life (in years)

Aggregate intrinsic valueOptions outstanding, September 30, 2008


18,273,632

$
7.02


4.86

$
212Granted


4,666,630


0.37Cancelled or expired


(1,425,660
)

8.22Options outstanding, June 30, 2009


21,514,602


5.49


5.36


Options exercisable, June 30, 2009


15,290,868

$
7.30


4.08

$



Restricted Stock Units

In September 2008, the Company also amended its 2001 Plan to clarify procedures for the issuance of Restricted Stock Units ("RSUs").
The first grant of RSUs following the amendment occurred on October 13, 2008. The grants vest over a three year period with 50% vesting one year plus one day from the date of grant and 25%
vesting on the second and third anniversaries of the date of grant.

On
January 16, 2009, the Company issued RSUs in connection with the tender offer discussed below. These grants vest one year plus one day from the date of grant.

A
summary of RSU activity during the nine-month period ended June 30, 2009 is as follows:

SharesRestricted stock outstanding, September 30, 2008


Awarded


3,609,233Forfeited


(156,605
)Restricted stock outstanding, June 30, 2009


3,452,628


Tender Offer

On December 1, 2008, Vitesse commenced a tender offer on Schedule TO (the "Offer") to amend Eligible Options (as defined
below) that had been granted under the 1991 Plan and the 2001 Plan (together, the "Plans"). An option to purchase Vitesse common stock was eligible for the Offer (an "Eligible Option") only if each of
the following conditions was met:



30

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 7. Shareholders' Equity (Continued)



Vitesse
undertook the Offer solely to avert the severe and, in Vitesse's view, unintended tax consequences to its option holders imposed by Section 409A of the Internal Revenue
Code of 1986 and similar state laws on some of its current employee stock option holders. Vitesse determined that certain stock options were erroneously assigned grant dates other than the actual date
of finalization of those grants. As a result, the exercise prices of those stock options were lower than they would have been if
the options had been dated when the grants were actually finalized. Therefore, those options may have subjected option holders to adverse tax consequences under Section 409A of the Internal
Revenue Code of 1986 if the fair market value of the shares were to exceed the exercise price for such shares at the end of any calendar year in which the option would have been exercisable or at the
time of exercise.

These
tax consequences include ordinary income tax on the spread between the exercise price and the value of the underlying shares (even if the option was not exercised), an additional
20% federal tax, and potential interest charges. In addition, some states, including California, impose an additional 20% state tax. In order to avoid these significant adverse tax consequences,
Vitesse completed the Offer on December 31, 2008.

The
Offer was accepted by all current employee holders of Eligible Options.

In
connection with the Offer, the Company amended the eligible options and granted restricted stock to all holders of the eligible options. In accordance with SFAS 123R, the
tender offer constituted a modification of the tendered options in combination with an inducement to accept the modification in the form of a grant of RSU's. The Company recorded compensation expense
as a result of the modification of the options and the grant of the inducement award equal to the change in the fair value of the original options immediately before the modification and that fair
value of the modified options combined the inducement award immediately after the modification. Option fair values were determined using the Black-Scholes valuation model and the fair value of the
restricted stock was equal to the market price of the Company's stock on the date of modification.

The
amount of compensation cost related to the modified options and restricted stock that is recognized through the end of each reporting period is equal to the incremental fair value of
the portion of the aggregate awards that have vested, or for partially vested awards, value of the portion of the awards that is ultimately expected to vest, for which the requisite services have been
provided.

Note 8. Legal Proceedings

We and certain current or former directors and officers of Vitesse were named in multiple shareholder derivative and securities class actions. These actions were filed starting in April
2006 and were based on allegations of stock option backdating and accounting manipulations. We also have received a grand jury subpoena from the United States Attorney's Office and were subject to an
SEC investigation.

31

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 8. Legal Proceedings (Continued)

The Derivative and Securities Class Actions

On April 7, 2008, the District Court approved the settlement of the consolidated securities class actions filed against Vitesse
and certain current or former directors and officers of Vitesse alleging violations of §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder on behalf of a class of purchasers of Vitesse common stock. The settlement of the consolidated securities class actions included a cash payment to the settlement fund of
$10.2 million: $8.75 million to be paid by Vitesse's directors' and officers' liability insurers and a total of $1.45 million to be paid by Louis R. Tomasetta and Eugene F.
Hovanec, two of the former executives of Vitesse. The same two former executives also contributed all shares of Vitesse common stock that they owned, totaling 1,272,669 shares. In addition, on
September 22, 2008, Vitesse contributed 2,650,000 shares of Vitesse common stock with a fair market value of $2.4 million, but no cash, to the settlement fund.

On
August 11, 2008, the Court granted final approval of settlements in the federal and state derivative actions filed on behalf of Vitesse against certain current or former
directors and officers of Vitesse, and
nominally against Vitesse alleging claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, constructive trust, rescission, accounting
manipulations, and violations of California Corporations Code §§25402 and 25403. As part of the settlement of the federal and state derivative actions, the Company adopted
certain Corporate Governance measures. Three former executives of Vitesse, Messrs. Tomasetta, Hovanec, and Mody, released the Company from all rights to future indemnification and costs of
defense in the related SEC and Department of Justice investigations. Vitesse retained the right to continue its state court action against KPMG, LLP, its former independent registered public
accounting firm.

On
January 14, 2009, Vitesse contributed 4,700,000 shares of Vitesse common stock, with a fair market value of $4.2 million to cover the attorneys' fees and expenses of the
derivative plaintiffs' counsel. The Court entered final judgment implementing all of the above referenced terms and the case is concluded in all respects.

The
Corporate Governance measures include implementing certain policies, procedures and guidelines relating to stock option grants and compensation decisions, incorporating greater
shareholder participation in the procedures for nominating independent directors, adopting additional standards of director independence, adding a "lead independent director," and incorporating
additional accounting policies, procedures and guidelines to be incorporated as part of these measures.

In
addition, the Company and certain current and former officers and directors of the Company who were named as defendants were dismissed from the lawsuits and have obtained releases
from the class and derivative plaintiffs.

The Dupuy Action

On April 10, 2007, an individual shareholder of Vitesse, Jamison John Dupuy, filed a complaint in the Superior Court of
California, County of Ventura, against Vitesse and three of its former officers (Case No. CIV 247776). Mr. Dupuy's complaint included causes of action for fraud, deceit and concealment, and
violation of California Corporations Code §§ 25400 et seq. Vitesse filed an answer, asserting numerous affirmative defenses. On March 3, 2008, Mr. Dupuy
filed an amended complaint that named six new defendants, all former employees, and included new causes of action for negligent

32

---



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2009

Note 8. Legal Proceedings (Continued)

misrepresentation
and violations of California Corporations Code § 1507. On April 4, 2008, after mediation before a retired United States District Judge for the Central
District of
California, the parties entered into a confidential settlement agreement and the plaintiff filed a dismissal of the action. The Company settled this lawsuit in the third quarter of 2008.

The DOJ Subpoena and SEC Investigation

In May 2006, we received a grand jury subpoena from the office of the United States Attorney for the Southern District of New York
requesting documents from 1999 through the present. The Division of Enforcement of the SEC also conducted an investigation of Vitesse. The Division of Enforcement requested documents from
January 1, 1995 through the present. Vitesse has cooperated with both government agencies in their investigations. While the investigation by the United States Attorney is still
on-going, the staff of the Division of Enforcement of the SEC has agreed to recommend to the Commission, a proposed settlement which would conclude for the Company all matters arising from
the SEC investigation into historical stock option practices and certain other accounting irregularities. Under the proposed settlement, the Company would pay a $3.0 million civil penalty and
consent to the entry of a final judgment by a federal court permanently enjoining the Company from violations of the antifraud and other provisions of the federal securities laws. In connection with
the Company's settlement with the staff of the Division of Enforcement of the SEC, we recorded a $3.0 million expense related to the civil penalty payable to the SEC. The proposed settlement is
contingent on the review and approval of final documentation by the Company and the staff of the Division of Enforcement of the SEC, and is subject to final approval by the Commission.

KPMG Lawsuit

On June 13, 2007, the Company filed a lawsuit in the Superior Court for the County of Los Angeles against KMPG LLP
("KPMG"), its former independent registered public accounting firm, alleging that KPMG was negligent in auditing the Company's stock option grants and financial statements during the years 1994 to
2000. The Company later amended its Complaint to include the years 2001 to 2004.

On
June 15, 2009, the Company announced that it had reached a settlement with KPMG. Pursuant to this settlement, KPMG agreed to pay the Company $22.5 million and forgive
all past indebtedness. Additionally, the parties agreed to execute mutual general releases of all claims. In June 2009, the Company received full payment of the settlement amount, net of fees,
expenses and outstanding indebtedness. The Company recorded the net proceeds and the forgiveness of the debt, totaling $16.0 million, as a credit to accounting remediation and reconstruction
expense and litigation costs.

Potential Payroll Tax Liabilities Related to Backdating of Stock Options

On June 29, 2009, the Company obtained final determination from the Internal Revenue Service ("IRS") regarding a settlement of
payroll taxes, penalties and interest related to the exercise of backdated stock options during the calendar years 2004 through 2006. During that period, certain non-qualified stock
options were improperly classified and treated as incentive stock options for tax purposes, resulting in underpayment of payroll taxes. The Company agreed to pay approximately $900,000 in full
satisfaction of the federal income tax liabilities and remitted payment in July 2009.

33

---





Table of Contents

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial
Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete
description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our
Annual Report on Form 10-K for the year ended September 30, 2008, which discusses our business in greater detail, filed with the Securities and Exchange Commission, or
SEC.

The section entitled "Risk Factors" contained in Part II, Item 1A of this Report, and similar discussions in our other SEC filings, describe some of
the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in
this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "may," "should," "estimates," "predicts," "potential," "continue," "becoming," "transitioning" and similar expressions to identify such forward-looking statements. Our
forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income, cash
commitments and expenses. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Risk Factors" under Part I, Item 1A of
this Annual Report. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

Over the last ten years, the worldwide proliferation of the Internet and the rapid growth in the volume of data being sent over Local
Area Networks ("LANs") and Wide Area Networks ("WANs") has placed a tremendous strain on the existing communications infrastructure. Communication service providers have sought to increase their
revenues by delivering a growing range of data services to their customers in a cost-effective manner. The resulting demand for increased bandwidth and services has created a need for
faster, larger and more complex networks. Additionally, due to increasing needs for moving, managing and storing mission-critical data, the market for storage equipment has been growing significantly.

We
are a leading supplier of high-performance integrated circuits ("ICs") principally targeted at systems manufacturers in the communications and storage industries. Within
the communications industry, our products address Carrier and Enterprise networking, where they enable data to be transmitted at high-speeds and processed and switched under a variety of
protocols.

In
recent years, we have focused our product development and marketing efforts on products that leverage the convergence of Carrier and Enterprise Networking onto IP-based
networks.
These Next-Generation Networks share the requirements of high reliability, scalability, interoperability and low cost. Increasingly, these networks will be delivered based on Ethernet
technology. We believe that products in this emerging technology area represent the best opportunity for us to provide differentiation in the market.

34

---



Table of Contents

In
Storage, our products address primarily enterprise class storage systems and blade-servers using Fibre Channel and Serial Attached SCSI ("SAS")/Serial Attached ATA ("SATA") protocols.
Our customers include leading communications and storage OEMs. On October 29, 2007, the Company completed its sale of a portion of the Storage Products business to Maxim Integrated
Products, Inc. ("Maxim"). Maxim acquired the Company's SAS/SATA expander product markets, enclosure and baseboard management devices and certain other assets of the Storage Product business.

In
the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2008, the Company provided a chronological listing of events that occurred
between April 2006 and December 2008, including, but not limited to, activities related to errors and irregularities in the disclosure of, and accounting for stock options granted by the Company to
its employees and the Board of Directors. A number of these events contributed directly to the delayed filing of the prior years' Annual Reports with the SEC.

The
Company filed its Annual Report on Form 10-K for the fiscal year ended September 30, 2008 on December 31, 2008, and has been current since such date
with respect to its Exchange Act reporting obligations.

Fiscal 2009 Actions

On January 26, 2009, the Company reduced the base salaries of its named executive officers, effective February 1, 2009,
as follows: (i) Mr. Gardner20% reduction; (ii) Mr. Yonker10% reduction; (iii) Mr. Green10% reduction; and
(iv) Mr. Nuss10% reduction. Also effective February 1, 2009, the Company suspended all matching contributions for its named executive officers in connection with the
Company's 401(k) plan. In addition, there were reduced wages and benefits to substantially all other employees of the Company. These actions shall remain effective through the end of the Company's
2009 fiscal year.

As
of March 31, 2009, the Company had eliminated 64 positions; approximately 12% of our total workforce. Of these positions, 53 positions, or approximately 10%, of the reductions,
related to full-time employees; the remaining reductions related to temporary staffing. The Company did not incur any facilities costs related to workforce reductions. All actions related
to workforce reductions through March 31, 2009 are complete and the Company does not have any additional reductions planned for the remainder of the fiscal year. A severance expense of
$0.5 million is included in our operating results for the nine months ended June 30, 2009.

Our Business Product Lines

Beginning in 2008, Vitesse classified product revenues into three markets: Carrier Networking, Enterprise Networking and
Non-Core. These classifications reflect the major trends in our product lines and how they map into our customer base. In addition, we have an IP revenue stream that was introduced in the
last quarter of 2008 and continued with the sale of certain patents in the third quarter of 2009.

Carrier Networking

The telecommunications Carrier Global Network, which includes networks delivering voice and data services, has grown dramatically to a
complex combination of networks. These networks are often classified into groups such as Wide Area Networks ("WANs"), Metropolitan Area Networks ("MANs"), Multi-Service Access Networks ("MSANs"), and
Radio Access Networks ("RANs"). Each of these types of networks has their own set of technical and operational challenges. These evolving networks must deliver more bandwidth and provide increasing
data-based capabilities to provide "quadruple play" services that integrate voice, data and video traffic over both wired and wireless networks. To address this problem, Carriers are
increasingly trying to map Ethernet services and

35

---



Table of Contents

connectivity
more efficiently into their existing networks. They may even replace their legacy network with new all-IP/Ethernet-based networks. Broadly, Ethernet technology upgraded to
meet these requirements is being referred to as "Carrier Ethernet." It is, in effect, an adaptation of Ethernet to provide the same features and functions that have traditionally been provided by
"telecom" protocols such as Synchronous Optical Network ("SONET/SDH"), Plesiochronous Digital Hierarchy ("PDH"), etc. Because of the complexity of the Carrier networks, products sold into these
applications have long design cycles, typically two to four years from design start to production, and long life cycles, typically five to ten years or more.

Vitesse
provides a variety of products into Carrier networking applications. These generally include: (i) Ethernet-over-SONET mappers, SONET framers and
switches; (ii) Optoelectronic physical media devices ("PMDs") and physical layer devices ("PHYs") such as transceivers and Clock and Data Recovery ("CDR"); (iii) Signal Integrity
Products including backplane transceivers, CDR, and crosspoint switches; (iv) Ethernet Media access controllers ("EMACs") and switches; (v) GbE Cu PHYs; and
(vi) Next-Generation Optical Transport Network ("OTN") mappers.

Enterprise Networking

Enterprise Networks generally include equipment dedicated to the communication of voice and data services within large enterprise
organizations. An Enterprise Network will typically be comprised of one or more LANs computer systems including workstations and servers, as well as one or more Service Access Networks ("SANs").
Enterprise Networks will also typically include broadband connections to Carrier Networks for the broader communication of voice and/or data outside of the enterprise. Enterprise Networks are often
classified into groups depending on their size and complexity. Typical categories are large Enterprise, data center switching, small-medium enterprise ("SME"), small medium business ("SMB"), and small
office home office ("SOHO"). Similar to Carrier Networks, Enterprise Networks are going through an evolution to provide more bandwidth, (i.e. more data at higher speeds) and more reliability,
interoperability, and scalability. Ethernet-based networks, which are already widely deployed in LANs, are becoming more prevalent in other enterprise applications such as data center switching and
SANs. Enterprises are paring down their multiple networks (telephone, LAN, video conferencing, wireless, and remote mirroring/backup) to a common switched IP/Ethernet-based infrastructure. Ethernet
technology that is being upgraded to meet these new requirements is generally referred to as "Converged Enhanced Ethernet." In addition, Enterprise Networks are migrating from fast 100 Mbps Ethernet
to Gigabit Ethernet and from Gigabit Ethernet to 10 Gigabit Ethernet. This transition is still in the early stages and expected to accelerate over the next several years. The complexity of products
within the Enterprise Networks varies dramatically based on the product application. Products at the "low-end" of the network, in SOHO, SME, and low-end SME applications
typically have fast design cycles in the order of six to 12 months and short life cycles, in the order of two to four years. Products sold into applications at the "high-end" of
Enterprise such as data center switching and high-end SME have longer design cycles, typically one to two years from design start to production and long life cycles, typically three to
five years or more. Vitesse provides a variety of products into Enterprise Networking applications. These generally include: (i) Ethernet MACs, switches, and routers; (ii) GbE Cu PHYs;
(iii) Integrated Cu PHY and switch products; and (iv) Signal Integrity products including backplane transceivers, CDRs and crosspoint switches.

Non-Core

Products that do not substantially sell into the Carrier or Enterprise Networking markets or require little or no current or future
investment have been classified as Non-Core products. Today, these products include legacy products from our Fibre Channel storage products line, our Raid-on-Chip
processor line, our network processor product line and our packet-based fabric switch product line.

36

---



Table of Contents

Intellectual Property

In 2008, we began to leverage our substantial IP portfolio into licensing opportunities with third-parties. We offer a variety of IP
"cores" and design services in deep submicron, 130 nm and 65 nm process technologies. To date, our primary focus has been our Gigabit Ethernet Cu PHY and switch technologies as well as
high-speed PHYs and signal integrity "cores".

We
anticipate being able to exploit our many years of technology development by providing this technology to systems suppliers and other semiconductor suppliers in the form of IP via
licensing arrangements. We believe we are in a unique position to supply such IP to other IC vendors as we are either the technology or low-power leader for such intellectual property, or
such IP is only available from IC vendors that are competing in the same markets as the companies looking for such IP. As a smaller, more focused and specialized IC vendor, we are less likely to
compete with those companies.

On
June 30, 2009, the Company entered into a Sale and Purchase Agreement (the "Agreement") and completed the sale, assignment and transfer of certain patents (the "Vitesse
Patents") from its intellectual property portfolio for consideration of IP revenue of $8.25 million. Payment was due and received on July 15, 2009. The Company incurred
$1.8 million in broker's fees related to the sale. The Company recorded the broker's fees in selling, general and administrative expense. The Vitesse Patents relate to the Company's
non-core business, specifically its network processing products.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of net revenue and expenses during the reporting period. We
regularly evaluate our estimates and assumptions related to revenue recognition, allowance for doubtful accounts, sales returns, inventory valuation, goodwill and purchased intangible asset
valuations, share-based compensation expense and income taxes. We base our estimates and assumptions on current facts, historical experience and on various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenues, costs and expenses that
are not apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and
the actual results, our future results of operations will be affected.

We
believe the following are either: (i) critical accounting policies that require us to make significant judgments and estimates in the preparation of our consolidated financial
statements; or (ii) other key accounting policies that generally do not require us to make estimates or judgments but may be difficult or subjective.

Revenue Recognition, Sales Returns Reserve and Allowance for Doubtful Accounts

In accordance with SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101") as well as SAB No. 104, "Revenue Recognition," ("SAB 104") we recognize product
revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or
determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the
terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete. We recognize revenue on goods shipped directly to
customers at the time of shipping, as that is when title passes to the customer and all revenue recognition criteria specified above are met.

37

---



Table of Contents

Vitesse
has a distribution network through which it sells most of its products. The Company recognizes revenue on a sell-through basis for all distributors, utilizing
information provided by the distributors. As of June 30, 2009, these distributors maintained inventory balances of $4.9 million, which are carried on the books of Vitesse, and are given
business terms to return a portion of inventory and receive credits for changes in selling prices to end customers. At the time Vitesse ships inventory to the distributors, the magnitude of future
returns and price adjustments is not known. Therefore, revenue recognition for shipments to distributors does not occur until the distributors sell inventory to end customers. Payments received from
distributors for inventory shipped to them, in advance of the sale of that inventory to the end-user, are shown as deferred revenue. Vitesse personnel are often involved with the sales
from the distributors to end customers.

At
June 30, 2009, approximately 2.8% of our inventory is consigned and located with a single customer. Consistent with our revenue recognition policy, we recognize revenue when
the customer pulls the inventory for use, as that is when title passes to the customer and all revenue recognition criteria specified above are met.

Revenues
from development contracts are recognized upon attainment of specific milestones established under customer contracts. Revenues from products deliverable under development
contracts, including design tools and prototype products, are recognized upon delivery. Costs related to development contracts are expensed as incurred.

On
December 28, 2007, the Company entered into an arrangement to license IP to a third-party. The contract is a perpetual, non-exclusive, non-transferable,
irrevocable license for specified intellectual property. As part of the contract, we were granted a perpetual, non-exclusive, non-transferable, irrevocable license to
improvements to the technology made by the licensee, subject to certain limitations. Under the agreement, Vitesse received $15.0 million in license fees and royalties for the rights to certain
products and technology. Of the fees and royalty payments, $10.0 million in fees was received upon delivery and acceptance of the licensed technology. The remaining $5.0 million of fees
was received upon the one-year anniversary of the agreement. For a period of seven years from the effective date of the contract, licensee will pay royalties on a per unit basis, on each
commercial sale incorporating the licensed products. Royalties will be accounted for when received. No royalties were received or recognized for the nine months ended June 30, 2009.

On
June 30, 2009, the Company entered into a Sale and Purchase Agreement (the "Agreement") and completed the sale, assignment and transfers of certain patents (the "Vitesse
Patents") from its intellectual property portfolio for consideration of IP revenue of $8.25 million with such payment due and received on July 15, 2009. The Company incurred
$1.8 million in broker's fees related to the sale. The Company recorded the broker's fees in selling, general and administrative expense. The Vitesse Patents relate to the Company's
non-core business, specifically its network processing products.

In
accordance with SAB 104, in the licensing of technology and other intangibles, delivery does not occur for revenue recognition purposes until the license term begins. Revenues
should be recognized in a manner consistent with the nature of the transaction and related earnings process. Pursuant to the guidance in SAB 104, revenue related to the licensing of
intellectual property is deferred until final acceptance of the contracted deliverables. Any royalties related to the licensing will be recognized when received.

We
record a reserve for estimated sales returns and allowances in the same period as the related revenues are recognized. Sales returns typically occur for quality related issues and
allowances are based on specific criteria such as rebate agreements. We base these estimates on our historical experience or the specific identification of an event necessitating a reserve. To the
extent actual sales returns or allowances differ from our estimates; our future results of operations may be affected.

38

---



Table of Contents

We
also maintain an allowance for doubtful accounts for estimated losses resulting from customers' inability to meet their financial obligations to us. We evaluate the collectability of
accounts receivable on a monthly basis based on a combination of factors. The Company includes any accounts receivable balances that are determined to be uncollectible in the overall allowance for
doubtful accounts using the specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Management believes the
allowance for doubtful accounts as of June 30, 2009 and September 30, 2008, is adequate. However, if the financial condition of any customer were to deteriorate, resulting in an
impairment of its ability to make payments, additional allowances could be required.

Inventory Valuation

Inventories are stated at the lower of cost or market (net realizable value). Costs associated with the development of a new product
are charged to engineering, research and development expense as incurred, until the product is proven through testing and acceptance by the customer. At each balance sheet date, the Company evaluates
its ending inventory for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand.

We
write down our inventory for estimated obsolete or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual market conditions are less favorable than our
estimates, additional inventory write-downs may be required. In the event we experience unanticipated demand and are able to sell a portion of the inventory we have previously written down, our gross
margins will be favorably affected.

Valuation of Goodwill, Purchased Intangible Assets, and Long-Lived Assets

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the
net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization, and the
amount assigned to in-process research & development is expensed immediately. The value of intangible assets, including goodwill, can be impacted by adverse changes such as declines
in operating results, a decrease in stock value, changes in the worldwide economy or a specific industry or a failure to meet performance projections.

We
account for goodwill and other intangible assets in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for
Goodwill and Other Intangible Assets" ("SFAS 142"). We evaluate these assets, including purchased intangible assets deemed to have indefinite lives, on an annual basis
in the fourth quarter, or more frequently, if we believe indicators of impairment exist or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider
important that could trigger an impairment review include significant underperformance to historical or projected operating results, substantial changes in our business strategy, and significant
negative industry or economic trends.

If
such indicators are present, we compare the fair value of the goodwill to its carrying value. Fair value of goodwill is determined by considering the Company's market capitalization,
discounted cash flows, and a market approach as of the valuation date. In considering the Company's market capitalization, an estimated premium to reflect the fair value on a control basis is applied.
This premium is estimated based on an evaluation of control premiums identifiable in comparable transactions.

For
other intangible assets and long-lived assets, in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), we determine whether the sum of the estimated undiscounted cash flows attributable to each asset in question is less than
its carrying value.

39

---



Table of Contents

If
less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value of other intangible assets is determined by discounted
future cash
flows, appraisals, or other methods. Fair value of long-lived assets is determined based on market value. If the long-lived asset determined to be impaired is to be held and
used, we recognize an impairment charge to the extent the fair value attributable to the asset is less than the asset's carrying value. The fair value of the long-lived asset then becomes
the asset's new carrying value, which we amortize over the remaining estimated useful life of the asset.

These
approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, and
long-term growth rates. It is reasonably possible that the estimates and assumptions used to value these assets differ from future actual results. If our actual results, or the estimates
and assumptions used in future impairment analyses, are lower than the original estimates and assumptions used to assess the recoverability of these assets, we could incur additional impairment
charges.

During
the quarter ended December 31, 2008, we identified changes in key factors indicating a possible impairment of the value of our goodwill. Notable indicators were
significantly depressed market conditions and industry trends, market capitalization below book value of equity and some downward revisions to our forecasts due to current economic conditions.
Continually changing market conditions make it difficult to project how long the current economic downturn may last. Declining market values have negatively impacted our valuations, which are a
component of our goodwill impairment tests. Upon completion of the first step of the impairment test for the quarter ended December 31, 2008, we determined that additional impairment analysis
was required by SFAS 142. The second step of the goodwill impairment test compared the implied fair value of our Company's goodwill with the carrying amount of that goodwill. Since the carrying
amount of goodwill exceeded the implied fair value of that goodwill, an impairment loss was recognized in an amount equal to that excess. The implied fair value of goodwill was determined in the same
manner as the amount of goodwill recognized in a business combination. The fair value was determined through an analysis of: (i) the market capitalization; (ii) comparable public company
valuations; and (iii) the future cash flows expected to be generated by the Company. The calculated fair value was then allocated to individual assets and liabilities (including any
unrecognized intangible assets) as if the Company had been acquired in a business combination and the fair value of the Company was the purchase price paid to acquire the Company. In performing this
allocation, the fair values of the assets of the Company were calculated using generally accepted valuation methodologies, including analysis of: (i) the future cash flows expected to be
generated; (ii) the estimated market value; or (iii) the estimated cost to replace. Any variance in the assumptions used to value the assets and liabilities could have had a significant
impact on the estimated fair value of the assets and liabilities and consequently the amount of identified goodwill impairment. As a result of the additional analyses performed, we recorded an
impairment charge to fully write-off our goodwill balance of $191.4 million for the quarter ended December 31, 2008.

Other
intangible assets, which consist primarily of technology and IP, are amortized over their estimated useful lives. The remaining lives of these assets range from less than one year
to three years. As required by SFAS 144, we verified our long-lived assets were not impaired as of the time of the goodwill impairment.

Valuation of Repurchase Right on Subordinated Debentures

In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), embedded derivatives must be bifurcated from the underlying debt instrument and valued as a separate financial instrument. Our 1.5% Convertible
Subordinated Debentures due 2024 (the "2024 Debentures") includes a repurchase right for 113.76% of the principal amount of the 2024 Debentures on October 1, 2009 (the "premium put") that we
have identified as an embedded

40

---



Table of Contents

derivative
requiring bifurcation and accounting at fair value because the economic and contractual characteristics of the premium put meet the criteria for separate accounting as set forth in
SFAS 133. We estimate the approximate fair value of the premium put as the difference between the estimated value of the 2024 Debentures with and without the premium put feature. The fair value
of the 2024 Debentures, both with and without the embedded premium put feature, was estimated using a convertible bond valuation model within a lattice framework. The valuation model combined expected
cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility and recent price quotes and trading information regarding shares of our common stock into
which the 2024 Debentures are convertible. Our analysis is premised on the assumption that the holder would act in a manner that maximizes the potential return, or "payoff", at any given point in
time. Included in this premise is the assumption that the holder would compare the potential return associated with each available alternative, including, as specified in the terms of the contract,
holding the debt instrument, exercising an equity conversion option, or exercising a put option. As a component of this, we incorporated a market participant consideration as to the Company's capacity
to fulfill the contractual obligations associated with each alternative, including the Company's ability to fulfill any cash settlement obligation associated with exercise of the put option. Based on
our analysis, we determined that the fair value of the premium put is most sensitive to the estimated amount of funds available for settlement of the liability on October 1, 2009. More
specifically, fair value of the premium put is positively correlated to the estimated amount of cash proceeds expected to be received at exercise. Should the premium put have value, any gain or loss
on the fair value of the premium put will be reflected in current earnings. The result of our valuation analysis was that premium put was estimated to have $4.6 million fair value as of
June 30, 2009 and no fair value as of September 30, 2008. The primary driver of the change in fair value between these dates was an increase in the amount of funds available for cash
settlement between the measurement dates.

Accounting for Share-Based Compensation

SFAS No. 123R "Share-Based Payments," ("SFAS 123R"), requires all share-
based payments, including grants of stock options and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values. Under this
standard, the
fair value of each employee stock option and employee stock purchase right is estimated on the date of grant using an option-pricing model that meets certain requirements.

SFAS 123R
requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We have estimated the fair value of each award as of the date of grant or assumption using the
Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model
considers, among other factors, the expected life of the award and the expected volatility of the Company's stock price. Although the Black-Scholes model meets the requirements of SFAS 123R,
the fair values generated by the model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those share-based payment awards, such as
continued employment, periodic vesting requirements, and limited transferability. Because the share-based compensation expense recognized in the statements of operations for the periods ended
June 30, 2009 and 2008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Changes in forfeitures from the estimates made at grant date could result in more or less
non-cash compensation expense in comparable periods.

41

---



Table of Contents

Assets and Liabilities of a Business Held for Sale

In accordance with SFAS 144 we classify the assets and liabilities of a business as held for sale when management approves and
commits to a formal plan of sale and it is probable that the sale will be completed. The carrying value of the net assets of the business held for sale are then recorded at the lower of their carrying
value or fair market value, less costs to sell. On December 22, 2008, we closed the sale of the Colorado land and building to a third-party. The gross sales price was $6.5 million. The
facility, which was previously used for the Storage Products business, remained unused since the sale of that business on October 29, 2007. As a result, the net book value of
$3.2 million was reported as 'Asset Held for Sale' on the September 30, 2008 balance sheet. We recognized a gain of approximately $2.9 million on this sale in the first quarter of
fiscal 2009.

Income Taxes

The Company accounts for income taxes using SFAS No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under SFAS 109, income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

The
Company maintains a valuation allowance on the deferred tax assets for which it is more likely than not that the Company will not realize the benefits of these deferred tax assets in
future tax periods. The valuation allowance is based on estimates of future taxable income by tax jurisdiction in which the Company operates, the number of years over which the deferred tax assets
will be recoverable, and scheduled reversals of deferred tax liabilities. SFAS 123R allows the benefit related to deductible temporary differences attributable to non-qualified
stock options to be credited to additional paid-in-capital when realized. Because the Company is in a net operating loss position as of September 30, 2008 and 2007, it
may not recognize a benefit arising from non-qualified stock options for those respective years.

In
assessing the realizability of deferred tax assets, management considers, on a periodic basis, whether it is more likely than not, that some portion or all of the deferred tax assets
will not be realized. As of September 30, 2008 and 2007, management has placed a valuation allowance against all deferred tax assets based on its overall assessment of the risks and
uncertainties. Accordingly, management believes the current valuation allowance on deferred tax assets is sufficient and properly stated at June 30, 2009 and September 30, 2008.

Research and Development

Research and development expense consists primarily of salaries and related costs of employees engaged in research, design and
development activities, including share-based compensation expense. Research and development expense also includes costs related to engineering design tools, masks and prototyping costs,
subcontracting costs and facilities expenses.

Impact of Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, "Business Combinations,"
("SFAS 141R"). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and

42

---



Table of Contents

measuring
the goodwill acquired in the business combination and determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, SFAS 141R is applicable to the
Company's accounting for business combinations closing on or after October 1, 2009. We expect SFAS 141R will have an impact on our consolidated financial statements, but the nature and
magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date of October 1, 2009.

In
April 2009 the FASB issued FSP No. 141R-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies," (FSP 141R-1). FSP 141R-1 amends the provisions in Statement 141R for the initial recognition and measurement, subsequent measurement and
accounting and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual
contingencies, including the initial recognition and measurement criteria in Statement 141R and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP
141R-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We expect FSP 141R-1 will have an impact on our consolidated financial statements, but the nature and magnitude of the
specific effects will depend upon the nature, term and size of the acquired contingencies.

In
December 2007, the FASB issued SFAS No. 160,"Non-controlling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51"("SFAS 160"). SFAS 160 addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent's ownership interest, and the valuation of retained
non-controlling equity investments when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We do not anticipate that
the adoption of SFAS 160 will have a material impact on our financial statements.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of FASB Statement
No. 133" ("SFAS 161"). SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities and is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008. We adopted SFAS 161 in the second quarter of fiscal 2009. Since SFAS 161 only required additional
disclosure, the adoption did not impact our consolidated financial position, results of operations or cash flows.

In
May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)" ("APB 14-1"). APB 14-1 requires us to separately account for the liability and equity
components of a convertible debt security by measuring the fair value of a similar nonconvertible debt security when interest cost is recognized in subsequent periods. APB 14-1
requires us to retroactively separate the liability and equity components of such debt in our consolidated balance sheets on a fair value basis. APB 14-1 is effective for fiscal
years beginning after December 15, 2008. We are currently evaluating the impact that APB 14-1 will have on our financial statements.

In
June 2008, the FASB ratified Emerging Issues Task Force ("EITF") Issue No. 07-5, "Determining Whether an Instrument (or an Embedded Feature)
Is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 provides that an entity should use a two step approach to evaluate whether
an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and the instrument's settlement provisions.
EITF 07-5 clarifies the impact of foreign currency denominated strike prices and market-based employee stock

43

---



Table of Contents

option
valuation instruments on the evaluation. EITF 07-5 is effective for the financial statements issued for fiscal years and interim periods within those fiscal years, beginning
after December 15, 2008 and will be applied to outstanding instruments as of the beginning of the fiscal year in which it is adopted. Upon adoption, a cumulative effect adjustment will be
recorded, if necessary, based on amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments. We are currently determining the impact
that EITF 07-05 will have on our financial statements, if any.

In
April 2009 the FASB issued three related Staff Positions: (i) FSP 157-4, "Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly," ("FSP 157-4"), (ii) SFAS 115-2 and
SFAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," ("FSP 115-2") and
("FSP 124-2"), and (iii) SFAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial
Instruments," ("FSP 107") and ("APB 28-1"), which will be effective for interim and annual periods ending after June 15, 2009. FSP 157-4
provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement
remains an exit price. If we were to conclude that there has been a significant
decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a
change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing
other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in
determining whether a debt security is other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of
SFAS 157 for both interim and annual periods. The adoption of this statement did not have an impact on our results of operation, financial position or cash flow.

In
May 2009, the FASB issued FAS No. 165, "Subsequent Events," ("FAS 165"). The purpose of FAS 165 is to establish
general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FAS 165 is effective for interim and annual
periods ending after June 15, 2009. We adopted this statement for our quarter ended June 30, 2009, and the adoption did not have an impact on our results of operations, financial
position or cash flows.

In
June 2009, the FASB issued FAS No. 168, "The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162" ("FAS 168"). FAS 168 establishes the FASB Standards Accounting Codification ("Codification") as the source of
authoritative U.S. GAAP recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The
Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. FAS 168 also replaces FASB Statement No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" given that once in effect, the Codification will carry the same level of authority. The Company does not anticipate that the adoption of this statement
will have a material impact on its consolidated financial statement footnote disclosures. FAS 168 is effective for financial statements issued for interim and annual periods ending after
September 15, 2009, which will be our year ending September 30, 2009. The adoption of this statement is not expected to have a material impact on our results of operations, financial
position or cash flows.

44

---



Table of Contents

Results of Operations for the Three and Nine Months Ended June 30, 2009 compared to the Three and Nine Months Ended June 30, 2008

The following table sets forth certain consolidated statement of operations data expressed as a percentage of net revenues for the
periods indicated:

Three Months
Ended
June 30,

Nine Months
Ended
June 30,2009

2008

2009

2008Net revenues


100.0
%

100.0
%

100.0
%

100.0
%Cost and expenses:Cost of revenues


38.7
%

50.8
%

44.9
%

49.0
%Engineering, research and development


25.1
%

22.6
%

26.1
%

23.0
%Selling, general and administrative


25.6
%

26.5
%

24.6
%

23.1
%Accounting remediation & reconstruction expense & litigation costs


(29.6
)%

3.8
%

(7.6
)%

5.4
%Goodwill impairment


0.0
%

0.0
%

148.4
%

0.0
%Amortization of intangible assets


0.8
%

0.6
%

0.8
%

1.4
%Costs and expenses


60.6
%

104.3
%

237.2
%

101.9
%Income (loss) from operations


39.4
%

(4.2
)%

(137.2
)%

(1.9
)%Other (expense) income:Interest expense, net


(13.0
)%

(2.0
)%

(6.3
)%

(1.7
)%Other (expense) income, net


(0.1
)%

6.4
%

0.0
%

2.6
%Other (expense) income, net


(13.1
)%

4.4
%

(6.2
)%

0.9
%Income tax (benefit) expense


(1.6
)%

0.0
%

(0.5
)%

(0.3
)%Minority interests in earnings of consolidated subsidiary


0.0
%

(1.2
)%

0.0
%

(0.4
)%Income (loss) from continuing operations before discontinued operations


27.9
%

(1.0
)%

(143.0
)%

(1.1
)%Discontinued operationsIncome from discontinued operations


0.2
%

3.1
%

0.1
%

5.0
%Net income (loss)


28.1
%

2.1
%

(143.1
)%

3.9
%


Net Product Revenues

We classify our IC products into three categories: (i) Carrier Networking Products; (ii) Enterprise Networking Products;
and (iii) Non-Core Products. The Networking Products line services core and metro WANs, also known as Carrier Networks. Our products are focused on enabling Ethernet data services
to be deployed more broadly across these networks. The Enterprise Networking Products line services the market for Ethernet switching and transmission within LANs in SMB and SME markets.

45

---



Table of Contents

Non-Core
Products are those product lines where we have chosen to exit markets and no longer continue to invest. The following tables summarize our net product mix by product line.

Three Months Ended
June 30, 2009

Three Months Ended
June 30, 2008Amount

% of Net
Revenues

Amount

% of Net
Revenues

Change

%
Change(in thousands, except percentages)Carrier Networking Products

$
16,689


45.9
%
$
22,596


41.1
%
$
(5,907
)

(26.1
)%Enterprise Networking Products


14,960


41.1
%

19,841


36.0
%

(4,881
)

(24.6
)%Non-Core Products


4,707


12.9
%

12,604


22.9
%

(7,897
)

(62.7
)%Net Product Revenues

$
36,356


100.0
%
$
55,041


100.0
%
$
(18,685
)

(33.9
)%




Nine Months Ended
June 30, 2009

Nine Months Ended
June 30, 2008Amount

% of Net
Revenues

Amount

% of Net
Revenues

Change

%
Change(in thousands, except percentages)Carrier Networking Products

$
51,582


44.6
%
$
68,051


41.7
%
$
(16,469
)

(24.2
)%Enterprise Networking Products


43,987


38.0
%

56,702


34.7
%

(12,715
)

(22.4
)%Non-Core Products


20,174


17.4
%

38,423


23.5
%

(18,249
)

(47.5
)%Net Product Revenues

$
115,743


100.0
%
$
163,176


100.0
%
$
(47,433
)

(29.1
)%


Net
product revenues for the third quarter of fiscal 2009 were $36.4 million compared to $55.0 million for the same period in fiscal 2008. This decrease of
$18.7 million or 33.9% was driven primarily by overall weaker customer demand and inventory corrections that our customers have implemented in response to the severely depressed global economic
environment. Carrier Networking was down $5.9 million or 26.1% due to a decline in both processing and physical layer products which was partially offset by growth in switching products.
Enterprise Networking was down $4.9 million or 24.6% due to a decline in CuPhy and Ethernet switch product segments. Sales of Non-Core Products were down $7.9 million or
62.7% due to a strong decline in Raid-on-Chip Processor products, Network Processor Products and legacy physical layer components. Our Non-Core Products are product
lines that have had minimal on-going investment over the prior three years and as a result have generally been in decline. We believe that these product lines are likely to be subject to
more severe inventory control and corrections by our customers.

For
the nine months ended June 30, 2009 and 2008, net product revenues decreased $47.4 million, or 29.1%, driven primarily by overall weaker customer demand and inventory
corrections that our customers have implemented in response to the severely depressed global economic environment. Carrier Networking was down $16.5 million, or 24.2%, due to a decline across
both processing and physical layer product segments. Enterprise Networking was down $12.7 million or 22.4% due to a decline in CuPHY and Ethernet switch product segments. Sales of
Non-Core Products were down $18.2 million or 47.5% due to a strong decline in Raid-on-Chip processor products, network processor products and legacy physical
layer components. These percentage decreases reflect a decline in order volume.

46

---



Table of Contents

Intellectual Property Revenues

Three Months Ended
June 30, 2009

Three Months Ended
June 30, 2008Amount

% of
Licensing
Revenues

Amount

% of
Licensing
Revenues

Change

%
Change(in thousands, except percentages)Intellectual Property revenues

$
8,250


100.0
%
$



100.0
%
$
8,250


100.0
%




Nine Months Ended June 30, 2009

Nine Months Ended June 30, 2008Amount

% of
Licensing
Revenues

Amount

% of
Licensing
Revenues

Change

%
Change(in thousands, except percentages)Intellectual Property revenues

$
13,250


100.0
%
$



100.0
%
$
13,250


100.0
%


In
the third quarter of 2009, we entered into the Agreement to sell certain patents from our IP portfolio for consideration of $8.3 million with such payment due and received on
July 15, 2009. We incurred $1.8 million in brokers fees related to the sale. We recorded the broker's fees in selling, general and administrative expense. The patents relate to our
non-core business, specifically its network processing products.

For
the nine months ended June 30, 2009, licensing revenues of $13.3 million included IP revenue of $8.3 million from the sale of patents from our IP portfolio and
$5.0 million from an arrangement, entered into in the first quarter of 2009, to license IP to a third-party. On December 28, 2007, the Company entered into an arrangement to license IP
to a third-party. Specific deliverables to the licensee were defined in the agreement and required acceptance from the licensee. Under the agreement, Vitesse received $15.0 million in license
fees for the rights to certain products and technology. Of the fees, $10.0 million was recognized upon delivery and acceptance of the licensed technology in the fourth quarter of 2008. The
remaining $5.0 million was recognized upon the one-year anniversary of the agreement in the first quarter of 2009. No royalties were received or recognized for the quarter ended
June 30, 2009.

Cost of Revenues

Three Months Ended June 30,

Change2009

2008

$

%(in thousands, except percentages)Cost of revenues

$
17,282

$
27,965

$
(10,683
)

(38.2
)%Percent of net revenues


38.7
%

50.8
%




Nine Months Ended June 30,

Change2009

2008

$

%(in thousands, except percentages)Cost of revenues

$
57,957

$
79,977

$
(22,020
)

(27.5
)%Percent of net revenues


44.9
%

49.0
%


As
a fabless semiconductor company, we use third-parties (including TSMC, IBM, Chartered, Amkor, ASAT and ASE) for wafer fabrication and assembly services. Our cost of revenues consists
predominantly of: (i) purchased finished wafers; (ii) assembly services; and (iii) labor and overhead

47

---



Table of Contents

costs
associated with product procurement and testing. It is customary in the semiconductor industry for product prices to decline over time. Therefore, it is imperative that we continue to reduce our
cost of revenues for mature products, by focusing our efforts on improving operating efficiencies, including reducing the price of purchased materials, improving product yields and cycle times and
reducing scrap.

Our
cost of revenues decreased from $28.0 million for the three months ended June 30, 2008 to $17.3 million for the same period in fiscal 2009, primarily due to a
decline in product sales. As a percentage of net revenues, our cost of revenues were 38.7% in the third quarter of fiscal 2009 compared with 50.8% in the third quarter of fiscal 2008, due to sales of
IP that carry no cost of sales. Additionally, we have taken cost reduction efforts to re-size operations for lower product sales volume. As a percentage of product revenues, our cost of
revenues were 47.5% in the third quarter of fiscal 2009, compared with 50.8% in the third quarter of 2008 due to ongoing efforts in yield improvement and general cost reduction.

Year-to-date
through June 30, 2009, our cost of revenues decreased to $58.0 million from $80.0 million in the same period of fiscal 2008. As
a percentage of net revenues, our cost of revenues were 44.9% for the nine months ended June 30, 2009 compared to 49.0% in the same period of fiscal 2008.

There
was no cost of revenues associated with IP licensing revenues of $8.3 million and $13.3 million in the three and nine months ended June 30, 2009, respectively.
As a percentage of product revenues, excluding IP revenue, cost of revenues were 47.5% and 50.1% in the three and nine months ended June 30, 2009, respectively, due to ongoing efforts in yield
improvement and general cost reduction.



Three Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Engineering, research and development

$
11,200

$
12,458

$
(1,258
)

(10.1
)%Percent of net revenues


25.1
%

22.6
%




Nine Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Engineering, research and development

$
33,720

$
37,584

$
(3,864
)

(10.3
)%Percent of net revenues


26.1
%

23.0
%


Engineering,
research and development expenses consist primarily of salaries and related costs, including share-based compensation expense of employees engaged in research, design, and
development activities. Engineering, research, and development also includes costs of mask sets, electronic design automation tools, software licensing contracts, subcontracting and fabrication costs,
depreciation and amortization, and facilities expenses.

Engineering,
research and development expenses decreased $1.3 million or 10.1% to $11.2 million in the third quarter of fiscal 2009 compared to $12.5 million in the
third quarter of fiscal 2008. Engineering, research and development expenses decreased $3.9 million or 10.3% to $33.7 million for the nine months ended June 30, 2009, compared to
$37.6 million in the nine months ended June 30, 2008. The decreases were due to continued cost control measures including more efficient utilization of mask sets, outside services and
travel.

48

---



Table of Contents

We
believe that continued investment in the design and development of future products is vital to maintaining a competitive edge. We have closely monitored our known and forecasted
revenue, demand and operating expense run rates. We continue to seek opportunities to focus research and development activities and will continue to closely monitor both our costs and our revenue
expectations in future periods. We will continue to concentrate our spending in this area to meet our customer requirements and respond to market conditions.

Selling, General and Administrative

Three Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Selling, general and administrative

$
11,412

$
14,570

$
(3,158
)

(21.7
)%Percent of net revenues


25.6
%

26.5
%




Nine Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Selling, general and administrative

$
31,761

$
37,758

$
(5,997
)

(15.9
)%Percent of net revenues


24.6
%

23.1
%


Selling,
general and administrative expense consists primarily of personnel-related expenses, including share-based compensation expense, legal and other professional fees, facilities
expenses, outside labor and communications expenses.

In
the third quarter of fiscal 2009, selling, general and administrative expense decreased by 21.7% or $3.2 million compared to the third quarter of fiscal 2008. As a percentage
of net revenues, selling, general and administrative expense decreased from 26.5% to 25.6%. The decrease is primarily due to a decrease in compensation-related expenses of $1.4 million as a
result of salary reductions and head count reductions. The Company also realized a reduction in professional services charges of $2.1 million. Due to extensive cost-reduction
efforts, facilities, travel and supplies expenses decreased by a total of $0.6 million from the third quarter of 2008. In the third quarter of fiscal 2008, we recognized bad debt from a
customer that went out of business. In the same period of fiscal 2009, we did not recognize any bad debt, resulting in a decrease in selling, general and administrative expense of $0.4 million.
During the quarter, the Company incurred $1.8 million in brokers fees related to the sale of certain intellectual property patents. Other sales related costs decreased by $0.4 million
during the quarter due to lower operating results, resulting in a net increase in sales related costs of $1.4 million.

Year
to date through June 30, 2009, selling, general and administrative expense decreased by 15.9% or $6.0 million compared to the same period last year. As a percentage of
net revenues, selling, general and administrative expense increased from 23.1% to 24.6%. The reductions in costs were driven primarily by a decrease in compensation-related charges of
$2.4 million as a result of salary reductions and head count reductions. Due to extensive cost-reduction efforts, facilities, travel and supplies expenses decreased by a total of
$1.9 million and share-based compensation decreased by $0.5 million due to the vesting of a substantial number of stock options during the first fiscal quarter of 2009. During the
period, professional fees decreased by $2.3 million compared to the same period in 2008. In the third quarter of fiscal 2008, we recognized bad debt from a customer that went out of business.
In the same period of fiscal 2009, we did not recognize any bad debt, resulting in a decrease in selling, general and administrative expense of $0.4 million. During the period, the Company
incurred $1.8 million in brokers fees related to the sale of certain intellectual property patents. Other sales

49

---



Table of Contents

related
costs decreased by $0.5 million during the period due to lower operating results, resulting in a net increase in sales related costs of $1.3 million. Additionally, during the
nine months ended June 30,
2009, we recognized a gain on the sale of our Colorado building of $2.9 million. In the same period of fiscal 2008, we recognized a gain on the sale of fixed assets of $3.2 million, a
difference of $0.3 million.

Accounting Remediation & Reconstruction Expense & Litigation Costs

Three Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Accounting remediation & reconstruction expense & litigation costs

$
(13,206
)
$
2,067

$
(15,273
)

(738.9
)%Percent of net revenues


(29.6
)%

3.8
%




Nine Months Ended June 30,

Change2009

2008

$

%(in thousands, except percentages)Accounting remediation & reconstruction expense & litigation costs

$
(9,742
)
$
8,813

$
(18,555
)

(210.5
)%Percent of net revenues


(7.6
)%

5.4
%


Accounting
remediation and reconstruction expense and litigation costs consisted of fees incurred to resolve certain legal issues, remediate control deficiencies, and transition
accounting and reporting responsibilities to full-time staff, in addition to the settlement of audits, investigations and lawsuits related to prior accounting periods. For the three months
ended June 30, 2009 and 2008, we recognized a net credit of $13.2 million and a charge of $2.1 million, respectively. The credit balance of $13.2 million is primarily made
up of the following:

During
the quarter, we reached a settlement with KPMG, our former public accounting firm, in which KPMG agreed to pay us $22.5 million and forgive all of our past indebtedness.
For the three months ended June 30, 2009, we recorded the settlement amount, net of fees and expenses, resulting in a net credit of $16.0 million.

During
the three months ended June 30, 2009, we also reached a settlement with the IRS related to the exercise of backdated stock options. As the settlement was less than we had
previously estimated and accrued, we recorded a credit of $0.7 million during the quarter.

In
connection with our pending settlement with the SEC, as proposed by the staff of the Division of Enforcement related to the their investigation into the Company's historical stock
option practices and certain other accounting irregularities, we recorded a $3.0 million accrual during the three months ended June 30, 2009.

Year-to-date,
we recognized a net credit of $9.7 million in fiscal 2009 and a charge of $8.8 million in fiscal 2008. In 2009 and 2008, we incurred
fees in connection with the preparation and issuance of our 2006 and 2007 financial statements and the remediation of other issues related to the restatement of our September 30, 2005 balance
sheet. Costs of work performed on stock option accounting and inventory valuation, revision of our revenue recognition policies, and other legal and financial issues were $4.1 million and
$8.8 million for the nine months ended June 30, 2009 and 2008, respectively. For the nine months ended June 30, 2009, we recorded a net credit of $16.0 million related to
the settlement with KPMG, and a credit adjustment of $0.7 million resulting from the IRS settlement for

50

---



Table of Contents

less
than estimated. During the period, we also accrued $3.0 million in expenses related to the estimated pending fine from the SEC.

Accounting
remediation and reconstruction costs are expected to decrease during the remainder of fiscal 2009 as we resolve certain legal issues.

Goodwill Impairment

Three Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Goodwill Impairment

$


$


$



0.0
%Percent of net revenues


0.0
%

0.0
%




Nine Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Goodwill Impairment

$
191,418

$


$
191,418


100.0
%Percent of net revenues


148.4
%

0.0
%


During
the quarter ended December 31, 2008, we identified changes in key factors indicating a possible impairment of the value of our goodwill. Notable indicators were
significantly depressed market conditions and industry trends, market capitalization below book value of equity and some downward revisions to our forecasts due to current economic conditions.
Continually changing market conditions make it difficult to project how long the current economic downturn may last. Declining market values have negatively impacted our valuations which are a
component of our goodwill impairment tests. Upon completion of the first step of the impairment test for the quarter ended December 31, 2008, we determined that additional impairment analysis
was required by SFAS 142. The second step of the goodwill impairment test compared the implied fair value of our Company's goodwill with the carrying amount of that goodwill. Since the carrying
amount of goodwill exceeded the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business combination. The fair value was determined through an analysis of: (i) the market capitalization; (ii) comparable public company
valuations; and (iii) the future cash flows expected to be generated by the Company. The calculated fair value is then allocated to individual assets and liabilities (including any unrecognized
intangible assets) as if the Company had been acquired in a business combination and the fair value of the Company was the purchase price paid to acquire the Company. In performing this allocation,
the fair values of the assets and liabilities of the Company were calculated using generally accepted valuation methodologies, including analysis of: (i) the future cash flows expected to be
generated; (ii) the estimated market value; or (iii) the estimated cost to replace. Any variance in the assumptions used to value the assets and liabilities could have had a significant
impact on the estimated fair value of the assets and liabilities and, consequently, the amount of identified goodwill impairment. As a result of the additional analyses performed, we recorded an
impairment charge to fully write off
our goodwill balance of $191.4 million for the quarter ended December 31, 2008. (See Note 3Goodwill in the accompanying financial statements).

51

---



Table of Contents

Amortization of Intangible Assets

Three Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Amortization of intangible assets

$
362

$
310

$
52


16.8
%Percent of net revenues


0.8
%

0.6
%




Nine Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Amortization of intangible assets

$
1,068

$
2,204

$
(1,136
)

(51.5
)%Percent of net revenues


0.8
%

1.4
%


Amortization
of intangible assets was $362,000 in the third quarter of fiscal 2009, compared to $310,000 for the same period in fiscal 2008. For the nine months ended June 30,
2009, amortization expense was $1.1 million compared to $2.2 million in the same period of fiscal 2008. The decrease in amortization expense is primarily due to intangible assets related
to our prior acquisitions of Cicada Semiconductor Corporation becoming fully amortized during fiscal 2008.

Interest Expense, net

Three Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Interest expense, net

$
(5,804
)
$
(1,112
)
$
(4,692
)

421.9
%Percent of net revenues


(13.0
)%

(2.0
)%




Nine Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Interest expense, net

$
(8,104
)
$
(2,706
)
$
(5,398
)

199.5
%Percent of net revenues


(6.3
)%

(1.7
)%


Interest
expense, net of interest income, increased by $4.7 to $5.8 million in the third quarter of fiscal 2009. For the nine months ended June 30, 2009, we recorded the
fair value of the premium put of $4.6 and no fair value for the same period prior year. The primary driver of the change in fair value between these dates was an increase in the amount of funds
available for cash settlement between the measurement dates. In addition, interest expense was $3.5 million, an increase of $0.8 million from the same period in the prior year. In
October 2007, in connection with the sale of the Storage Products business, the Company replaced its debt to Tennenbaum Capital Partners ("TCP") with a note to Whitebox VSC, Ltd. ("Whitebox").
Interest expense incurred on the TCP debt in fiscal 2008 was recorded as a component of discontinued operations. Interest expense on the debt with Whitebox is

52

---



Table of Contents

reflected
in interest expense. For fiscal 2009, nine months interest expense was incurred on the Whitebox debt compared to eight months of interest incurred on the debt during the comparable period of
2008. Interest expense on the subordinated 2024 Debentures for fiscal 2009 was consistent with fiscal 2008. Although the Company maintained higher average cash balances, significant declines in
interest rates earned on deposit accounts from fiscal 2008 to fiscal 2009 reduced the amount of interest income included in net interest expense.

Other Income (Expense), net

Three Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Other income (expense), net

$
(38
)
$
3,513

$
(3,551
)

(101.1
)%Percent of net revenues


(0.1
)%

6.4
%




Nine Months Ended
June 30,

Change2009

2008

$

%(in thousands, except percentages)Other income (expense), net

$
58

$
4,236

$
(4,178
)

(98.6
)%Percent of net revenues


0.0
%

2.6
%


Other
income, net of other, expense was $38,000 in the third quarter of fiscal 2009 compared to other income, net of expense was $3.5 million in the third quarter of fiscal 2008.
The decrease is due to recording gains on the sale of available-for-sale securities held by Vitesse and its subsidiaries in the third quarter of 2008, we did not record similar
transactions for the three months ended 2009.

For
the nine months ended June 30, 2009, other income, net of other expense, was $58,000 a decrease of $4.2 million from the same period of fiscal 2008. This decrease is
primarily due to recording gains on the sale of available-for-sale securities held by Vitesse and its subsidiaries in the third quarter of 2008 with the remaining due to
recording income related to the settlement of a breach of contract lawsuit and a gain on sale of scrap material in the first quarter of 2008, we did not record similar transactions for the nine months
ended 2009.

Income Tax (Benefit) Expense

Three Months Ended June 30,

Change2009

2008

$

%(in thousands, except percentages)Income tax (benefit) expense

$
(696
)
$
3

$
(699
)

(23300.0
)%Percent of net revenues


(1.56
)%

0.0
%


53

---



Table of Contents



Nine Months Ended June 30,

Change2009

2008

$

%(in thousands, except percentages)Income tax (benefit)

$
(600
)
$
(546
)
$
(54
)

9.9
%Percent of net revenues


(0.5
)%

(0.3
)%


Income
tax benefit was $0.7 million for the third quarter of fiscal 2009 compared to income tax expense of $3,000 for the third quarter of fiscal 2008. Income tax benefit
represents the impact of taxable losses for the three months ended June 30, 2009 and adjustments to deferred tax assets and the related valuation allowance. For the three months ended
June 30, 2008, income tax expense represents minimum federal, state, and foreign income tax on income not eligible for offset by loss carryforwards after the allocation of income tax expense to
discontinued operations.

Income
tax benefit was $0.6 million for the nine months ended June 30, 2009 compared to income tax benefit of $0.5 million for the nine months ended June 30,
2008. Net income tax expense represents minimum federal, state, and foreign income tax on income not eligible for offset by loss carryforwards and adjustments to deferred tax assets and the related
valuation allowance. Income tax benefit for the nine months ended June 30, 2008 reflects the impact of taxable losses for the period after the allocation of income tax expense to discontinued
operations.

Minority Interest in Earnings of Consolidated Subsidiary

Three Months Ended June 30,

Change2009

2008

$

%(in thousands, except percentages)Minority interest in earnings of consolidated subsidiary

$


$
(660
)
$
660


(100.0
)%Percent of net revenues


0.0
%

(1.2
)%




Nine Months Ended June 30,

Change2009

2008

$

%(in thousands, except percentages)Minority interest in earnings of consolidated subsidiary

$
1

$
(660
)
$
661


(100.2
)%Percent of net revenues


0.0
%

(0.4
)%


A
minority interest in the operations of our consolidated joint ventures, the Vitesse Venture Fund, L.P. and the Vitesse Venture Fund, L.P. II (together, "the Funds"), was
recorded in the first quarter of fiscal 2009, representing the limited partners' interest in the Funds' operating expenses, including licensing and bank fees. A minority interest in the income of our
consolidated joint venture was recorded in the third quarter of fiscal 2008, representing the limited partners' interest in the Fund's gain on the sale of available-for-sale
securities. The limited partners' portion of the gain totaled $660,000 for the quarter and nine months ended June 30, 2008.

54

---



Table of Contents

Income and gain on the sale of discontinued Storage Products

Three Months Ended June 30,

Change2009

2008

$

%(in thousands, except percentages)Gain (loss) on discontinued Storage Products business, net

$
71

$
1,703

$
(1,632
)

(95.8
)%Percent of net revenues


0.2
%

3.1
%




Nine Months Ended June 30,

Change2009

2008

$

%(in thousands, except percentages)Gain (loss) on discontinued Storage Products business, net

$
71

$
8,101

$
(8,030
)

(99.1
)%Percent of net revenues


0.1
%

5.0
%


On
October 29, 2007, the Company completed its sale of a portion of the Storage Products business to Maxim Integrated Products, Inc. ("Maxim") for $62.8 million,
with a gain on the sale of approximately $21.5 million, plus a potential earn-out based on the business meeting certain criteria, as detailed in the agreement. Maxim acquired the
Company's SAS/SATA expander product markets, enclosure and baseboard management devices and certain other assets of the Storage Product business. Assets sold included inventory, property &
equipment, goodwill and intangible assets of $35.5 million. As part of the sale, Maxim assumed a liability for employees' accrued vacation of $0.3 million. The gain was reduced by costs
of completing the sale in the amount of $1.6 million.

Debt
issuance costs related to the TCP debt of $3.5 million were included in the calculation of the gain on the sale pursuant to the accounting guidance in EITF Issue
87-24, "Allocation of Interest to Discontinued Operations" ("EITF 87-24"), which requires any costs related to financing
that must be paid off with the proceeds of the sale of specific assets to be included in the determination of the gain or loss on the sale. In accordance with EITF 87-24, we
allocated to discontinued operations interest expense associated with debt instruments that were required to be repaid upon the sale of the Storage Product business. Pursuant to an amendment to the
debt agreement with TCP we were required to pay the debt to TCP from the Storage Products division sale proceeds. Accordingly, for the nine months ended June 30, 2008, interest expense of
approximately $16.9 million was included in discontinued operations. Interest expense included a "make-whole" payment of $16.4 million and interest expense and amortization
of deferred financing fees of $0.5 million.

For
the three and nine months ended June 30, 2009, income from discontinued operations was $71,000, which included $71,000 of income from the earn-out, net of tax.

For
the three months ended June 30, 2008, income from discontinued operations was $1.7 million, which included $1.7 million of income from the earn-out
and residual operations, net of tax. For the nine months ended June 30, 2008, results of discontinued operations were comprised of the gain on the sale of $21.5 million, offset by the
loss on discontinued operations of $13.4 million, net of tax of $1.0 million.

For
the nine months ended June 30, 2008, we reported the results of operations of the Storage Products business as discontinued operations in the Company's statement of operations
in accordance with SFAS 144.

55

---





Table of Contents

The following table sets forth selected operating results:

Three Months Ended June 30,

Nine Months Ended June 30,2009

2008

2009

2008(in thousands)

(in thousands)Net revenues

$


$
73

$


$
2,656Income (loss) from continuing operations before income taxes


11,714


72


(185,235
)

(1,630
)Provision for income tax benefit (expense)


(696
)

3


(600
)

(546
)Minority interests in earnings of consolidated subsidiary





(660
)

1


(660
)Income from discontinued operations


71


1,703


71


8,101Net income

$
12,481

$
1,112

$
(184,563
)
$
6,357




Cash and cash equivalents increased to $51.4 million at June 30, 2009, from $36.7 million at September 30,
2008, as a result of the following:

Nine Months Ended June 30,2009

2008(in thousands)Net cash provided by (used in) operating activities

$
12,251

$
(27,188
)Net cash provided by investing activities


2,449


66,189Net cash used in financing activities





(31,267
)Net increase in cash and cash equivalents

$
14,700

$
7,734Cash and cash equivalents at beginning of period


36,722


25,976Cash and cash equivalents at end of period

$
51,422

$
33,710


In
the nine months ended June 30, 2009, our operating activities provided $12.3 million in cash. Our net loss of $184.6 million for the nine months ended
June 30, 2009 included $4.6 million of fair value adjustment to the premium put, $3.3 million of depreciation, $2.4 million of stock-based compensation, and
$191.4 million of goodwill impairment offset by the gain on sale of the Colorado building of $2.9 million. In the nine months ended June 30, 2008, our operating activities used
$27.2 million in cash. This was primarily the result of a $6.4 million net income from continuing and discontinued operations, $20.0 million in net non-cash operating
expenses, which includes the gain on sale of the Storage Products business of approximately $21.5 million and $13.6 million net cash used by changes in operating assets and liabilities.

Accounts
receivable increased $8.6 million from $6.3 million at September 30, 2008 to $14.9 million at June 30, 2009. The increase is primarily due to
the sale of patents from our intellectual property portfolio for $8.25 million. Inventories decreased $13.5 million from $37.5 million at September 30, 2008 to
$23.9 million at June 30, 2009, as we reduced our inventory purchases to reflect the reduction in revenues and our channel partners and distributors took action to reduce their inventory
in response to current economic slowdown. We were able to respond quickly to the change in demand, reducing orders to our suppliers. Our inventory levels will continue to be determined based upon the
level of purchase orders we receive, our ability and the ability of our customers to manage inventory levels. Such considerations are balanced against the risk of obsolescence or potentially excess
inventory levels.

56

---



Table of Contents

Accrued
expenses decreased by $5.9 million, including reductions of accrued income taxes and accrued wages. The decrease is primarily due to finalizing the settlement of the
derivative and employee lawsuits of approximately $4.5 million and reduction in accrued wages resulting from resolution of the IRS audit on stock compensation for $1.6 million. Accrued
income taxes decreased by $2.2 million
primarily due to tax payments made during the nine months ended June 30, 2009. In addition, deferred revenue decreased by $2.1 million as a result of the decline in distributor
purchases.

Investing
activities provided cash of $2.4 million in the nine months ended June 30, 2009, which was primarily the result of the proceeds from the sale of the Colorado
building for $6.0 million, net of commissions and transactions costs, partially offset by capital expenditures of approximately $1.5 million and additions to intangibles of
$2.0 million. For the nine months ended June 30, 2008, investing activities provided cash of $66.2 million which was primarily the result of the proceeds from the sale of Storage
Products business to Maxim for $62.8 million in cash in the first quarter of 2008.

We
did not enter into any financing activities for the nine months ended June 30, 2009. In the first nine months of fiscal 2008, our financing activities used $31.3 million
in cash, which was primarily a result of the repayment of our $59.5 million debt with TCP, offset by the proceeds received from Whitebox for $29.3 million. (See Debt Note in the
accompanying financial statements).

Our
operating expenses for the nine months ended June 30, 2009 include expenses related to our restructuring and remediation efforts, which were offset by $13.8 million
credit comprised of approximately $16.0 million net proceeds received in settlement with our prior accounting firm, $3.0 million expense related to a fine from the SEC for past
accounting irregularities and an adjustment of $0.7 million reduction in costs for settlement of an IRS audit. (See Item 2Management's Discussion and Analysis of Financial
Condition and Results of Operations). These remediation and restructuring costs are expected to continue to decrease during the remainder of fiscal 2009 as we resolve certain legal issues.

On
December 28, 2007, the Company entered into an arrangement to sell intellectual property to a third-party. The contract is a perpetual, non-exclusive, irrevocable
license for specified intellectual property. Under the agreement, Vitesse received $15.0 million in the form of a license fee and royalties for certain licensed products and core technology.
The license fee is paid over time, subject to certain milestones. We received $8.0 million in cash in fiscal 2008 and $4.0 million in the first quarter of 2009. The remaining amount was
withheld for foreign taxes.

On
December 22, 2008, we closed the sale of the Colorado land and building to a third-party. The gross sales price was $6.5 million and cash received after commissions and
transaction costs was $6.0 million. The facility was previously used for the Storage Products business, which was discontinued and sold on October 29, 2007 and had remained unused since.
As a result, the net book value of $3.2 million was reported as "Asset Held for Sale" on the September 30, 2008 balance sheet. We recognized a gain of approximately $2.9 million
on this sale in the first quarter of fiscal 2009.

On
June 30, 2009, the Company entered into the "Agreement" and consummated the sale, assignment and transfers of certain patents (the "Vitesse Patents") from its intellectual
property portfolio for consideration of IP revenue of $8.25 million with such payment due and received in July, 2009. The Company incurred $1.8 million in brokers fees related to the
sale. The Company recorded the broker's
fees in selling, general and administrative expense. The Vitesse Patents relate to the Company's non-core business, specifically its network processing products. On July 14, 2009,
we received full payment of $8.25 million.

Management
believes we have sufficient resources to fund our normal operations through at least September 30, 2009. However, on October 1, 2009 the holders of our 2024
Debentures have the right to require us to repurchase the 2024 Debentures for 113.76% of the principal amount of the 2024 Debentures to be purchased, which results in an additional payment of
$13.3 million on the

57

---



Table of Contents

$96.7 million
of outstanding 2024 Debentures. According to the terms of the Whitebox Agreement, under certain circumstances, repayment of the 2024 Debentures would require that the Company to
immediately pay to Whitebox the lesser of (A) the aggregate principal amount of the outstanding Whitebox debt, including accrued and unpaid interest and (B) 25% of the aggregate amount
of the 2024 Debentures redeemed. Prior to June 30, 2009, the Company was pursuing alternatives to refinance or raise funds to pay the convertible subordinated debt that in management's judgment
met the terms in the Whitebox debt agreement that did not require payment of the Whitebox debt simultaneously with the payment of the convertible subordinated debt. As of June 30, 2009,
management has concluded that the alternatives currently being pursued to generate funds to pay the convertible subordinated debt would not meet the terms in the Whitebox debt agreement and
accordingly has classified the Whitebox debt as current based on the anticipation that payment of all or a portion of the convertible subordinated debt pursuant to the premium put would require
simultaneous payment of all or a portion of the Whitebox debt. Further, concern regarding our ability to refinance the debt has resulted in the reduction of our credit limit by one of our larger
vendors and may result in additional reductions in our credit limits as long as there is uncertainty regarding our ability to refinance the debt. Although we remain current in our obligations to this
and all other of our vendors, reductions in our credit limits by our vendors could significantly reduce our available cash balance.

We
are working to either renegotiate the terms of or find a means to repay the 2024 Debentures. However, to date, we have not been able to renegotiate those terms or find a source of
financing to repurchase or refinance the 2024 Debentures. If we have insufficient cash to repurchase all of the 2024 Debentures tendered for repurchase, our failure to repurchase such 2024 Debentures
would likely result in an event of default under the 2024 Debentures and cause an event of default under our $30 million secured debt agreement, which in turn would likely result in an
acceleration of that debt as well. In November 2008, our Board of Directors formed a Strategic Development Committee (the "SDC") for the purpose of exploring strategic alternatives. In December 2008,
we hired a financial advisor to assist the SDC with its efforts and in 2009 we hired an additional financial advisor to advise and assist the SDC with potential strategies for restructuring the terms
of the 2024 Debentures. The SDC is continuing to explore strategic alternatives for repayment of the 2024 Debentures and strategies for restructuring the terms of the 2024 Debentures. There can be no
assurance that we will be successful in raising additional capital, entering into any strategic transaction or renegotiating or settling all or any part of the 2024 Debentures prior to
October 1, 2009. If we are unable to renegotiate or settle the 2024 Debentures, our business, financial condition and results of operations will likely be materially and adversely affected, as
a result of these circumstances there exists significant uncertainty about the Company's ability to continue as a going concern. (See "Risk Factors" below for further information with respect to
events and uncertainties that could harm our business, operating results, and financial condition.)

Long-Term Debt, Contingent Liabilities and Operating Leases

The following table summarizes our significant contractual obligations as of June 30, 2009:

Payment Obligation by Year
(in thousands)2010

2011

2012

2013

2014

Thereafter

TotalLong-term debt

$


$


$
30,000

$


$


$


$
30,000Convertible subordinated debt


96,700

















96,700Operating leases


2,998


3,084


2,957


2,925


1,744


1,252


14,961Inventory and related purchase obligations


7,749

















7,749Software licenses


6,648


5,173


42











11,863Total

$
114,095

$
8,258

$
32,999

$
2,925

$
1,744

$
1,252

$
161,273


58

---



Table of Contents

Currently,
$96.7 million of the 2024 Debentures are outstanding. Additionally, we have $30.0 million in long-term debt with Whitebox. Payments to Whitebox are
interest only until the maturity date of October 29, 2011. (See Note 5Debt in the accompanying financial statements). According to the terms of the Whitebox Agreement, under
certain circumstances, repayment of the 2024 Debentures would require that the Company to immediately pay to Whitebox the lesser of (A) the aggregate principal amount of the outstanding
Whitebox debt, including accrued and unpaid interest and (B) 25% of the aggregate amount of the 2024 Debentures redeemed. Prior to June 30, 2009, the Company was pursuing alternatives to
refinance or raise funds to pay the convertible subordinated debt that in management's judgment met the terms in the Whitebox debt agreement that did not require payment of the Whitebox debt
simultaneously with the payment of the convertible subordinated debt. As of June 30, 2009, management has concluded that the alternatives currently being pursued to generate funds to pay the
convertible subordinated debt would not meet the terms in the Whitebox debt agreement and accordingly has classified the Whitebox debt as current based on the anticipation that payment of all or a
portion of the convertible subordinated debt pursuant to the premium put would require simultaneous payment of all or a portion of the Whitebox debt.

We
lease facilities under non-cancellable operating leases that expire through 2015. Approximate minimum rental commitments under all non-cancellable operating
leases as of June 30, 2009, are included in the table above.

Inventory
and related purchase obligations represent non-cancellable purchase commitments for wafers and substrate parts. Software license commitments represent
non-cancellable licenses of intellectual property from third-parties used in the development of the Company's products.

For
purposes of the table above, obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant
terms. Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our vendors within a relatively short time horizon.

Subsequent Events

On July 8, 2009, Vincent Chan, Ph.D. resigned as a Director from the Company's Board of Directors. Dr. Chan was an
independent Director who was elected to the Board in April 2000 and served on the Compensation, Nominating and Corporate Governance committees.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and
rates. Our market risk exposure is primarily a result of fluctuations in foreign exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.

Cash Equivalents and Investments

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of
June 30, 2009, the carrying value of our cash and cash equivalents approximated fair value because of the ready market for the cash instruments.

Our
investment in the equity securities of a privately-held company is valued using the cost method. The value of this investment is subject to market fluctuations and other
economic conditions which could cause the amount to be realized upon sale of the investment to differ from the current reported value.

59

---



Table of Contents

Foreign Currency Exchange Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales to customers and arrangements
with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States'
dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States' dollar
relative to other currencies could result in our suppliers raising their prices to continue doing business with us. The Company funds operations in international jurisdictions. All disbursements from
these locations are made in the local currency of the foreign country. Fluctuations in the value of the United States' dollar relative to the currencies of these other countries could make the cost of
operations in these other countries more expensive and negatively impact the Company's cash flows.

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We evaluated the design and operating effectiveness of our disclosure controls and procedures as of June 30, 2009, under the
supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15(b) of the Exchange Act. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2009 our disclosure controls and procedures were not effective;

In
addition, management has identified the following material weaknesses in our internal control over financial reporting:



Changes in Internal Control over Financial Reporting

Management is committed to remediating the material control weaknesses identified and implementing changes to the Company's internal
control over financial reporting. During this fiscal year, we have continued to focus on our internal controls and have taken steps to strengthen controls

60

---



Table of Contents

in
response to the identified material weaknesses. Significant internal control and process improvements have been implemented to enhance effectiveness including:



In
addition to the continuing changes noted above, for the period ended June 30, 2009, we have made the following changes to our internal control over financial
reporting:



As
a result of the above actions, we believe our control environment and specifically controls over our financial reporting process, have improved substantially. We are currently
conducting extensive assessments of the effectiveness of the remediated internal control over financial reporting, and will make the determination as of the end of the fourth quarter if our controls
are operating with level of effectiveness and sustainability to prevent a material error from occurring and not being detected in a timely manner.

We
are investing in ongoing efforts to continuously improve the control environment and have committed considerable resources to the continuous improvement of the design, implementation,
documentation, testing, and monitoring of our internal controls.

Please
see further discussion of our controls and procedures in Part II, Item 9A. Controls and Procedures in Form 10-K to the Annual Report on
Form 10-K for the year ended September 30, 2008.

61

---



Table of Contents

PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

The information set forth under Note 7 of Notes to Unaudited Consolidated Financial Statements, included in Part I,
Item 1 of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see "Risk Factors" immediately below.

ITEM 1A.    RISK FACTORS

You should carefully consider the risks described below before investing in our securities. We have organized our risks into the
following categories:



Risks Relating to Our Liquidity; Financing Arrangements and Capital Commitments

We have not been able to renegotiate the terms of our 1.5% Convertible Subordinated Debentures Due 2024 (the "2024 Debentures") or raise the capital necessary to repurchase
some or all of the 2024 Debentures, consequently there is substantial risk that we may not be able to continue as a going concern.

The holders of our 2024 Debentures have the right, as of October 1, 2009, to require us to repurchase some or all of the 2024
Debentures at a price equal to 113.76% of the principal amount of the 2024 Debentures. If all of the holders of the 2024 Debentures exercise their repurchase rights, the total repurchase price would
be $110.0 million. We currently do not have the resources to repay the principal amount and related premium if the 2024 Debentures were put to the Company for repayment on October 1,
2009.

We
are working to either renegotiate the terms of, or find a means to repay the 2024 Debentures. However, to date, we have not been able to renegotiate those terms or find a source of
financing to repurchase or refinance some or all of the 2024 Debentures. If we have insufficient cash to repurchase all of the 2024 Debentures tendered for repurchase, our failure to repurchase such
2024 Debentures would likely result in an event of default under the 2024 Debentures and cause an event of default under our $30 million secured debt agreement, which in turn would likely
result in an acceleration of that debt as well. In November 2008, our Board of Directors formed a Strategic Development Committee (the "SDC") for the purpose of exploring strategic alternatives. In
December 2008, we hired a financial advisor to assist the SDC with its efforts and in 2009 we hired an additional financial advisor to advise and assist the SDC with potential strategies for
restructuring the terms of the 2024 Debentures. The SDC is continuing to explore strategic alternatives for repayment of the 2024 Debentures and strategies for restructuring the terms of the 2024
Debentures. There can be no assurance that we will be successful in raising additional capital, entering into any strategic transaction or renegotiating or settling all or any part of the 2024
Debentures prior to October 1, 2009. If we are unable to renegotiate or settle the 2024 Debentures our business, financial condition and results of operations will likely be materially and
adversely affected, as a result of these circumstances there exists significant uncertainty about the Company's ability to continue as a going concern.

If required, our ability to repurchase our debentures with cash may be limited and failure to repurchase the debentures could constitute an event of default.

Our ability to repurchase the 2024 Debentures may be limited by law, by the indenture associated with the 2024 Debentures, by the terms
of other agreements relating to our senior debt, and by such indebtedness and agreements as may be entered into, replaced, supplemented, or amended from time

62

---



Table of Contents

to
time. We may be required to refinance our debt in order to make such payments. We may not have the financial ability to repurchase the 2024 Debentures if payment of our debt is accelerated. If we
fail to repurchase the 2024 Debentures as required by the indenture, it would constitute an event of default that, in turn, may also constitute an event of default under our other debt obligations. We
are unaware of any specific limitations to our ability to repurchase the debentures. Should we become aware of any specific limitations on our ability to repurchase the debentures, we will assess the
impact of the limitations. We will also account for and disclose any impact to our financial statements as appropriate.

Any transaction to repurchase, refinance or renegotiate the terms of the 2024 Debentures may have a negative impact on shareholder equity value.

We have explored a number of types of transactions in order to repurchase, refinance or renegotiate the terms of the 2024 Debentures.
If we are successful in negotiating a transaction that results in the repurchase, refinance or renegotiation of the terms of the 2024, there can be no assurance that such a transaction will not result
in significant dilution to the existing stockholders or otherwise have an adverse effect on the value of the Company's common stock.

We have received an audit opinion expressing an uncertainty about our ability to continue as a going concern.

The audit report issued by our independent registered public accounting firm on our audited financial statements for the fiscal year
ended September 30, 2008 contains an uncertainty regarding our ability to continue as a going concern. This concern is largely due to the right of the holders of the 2024 Debentures,
exercisable on October 1, 2009, to require us to repurchase some or all of the 2024 Debentures at a price equal to 113.76% of the principal amount of the 2024 Debentures.

This
uncertainty indicates there is substantial doubt as to our ability to continue as a going concern due to the risk that we may not have had sufficient cash and liquid assets at
September 30, 2008 to cover our operating capital requirements for the next twelve-month period, including the potential requirement to repurchase some or all of the 2024 Debentures, and if
sufficient cash cannot be obtained we would have to substantially alter our operations, or we may be forced to discontinue operations. A going concern uncertainty may limit our ability to access
certain types of financing, or may prevent us from obtaining financing on acceptable terms.

We have experienced losses from operations and we anticipate future losses from operations.

For the nine months ended June 30, 2009, the Company had a net loss of $185.4 million, primarily due to an impairment
charge to fully write off a goodwill balance of $191.4 million. For the quarter ended June 30, 2009, the Company had a net income of $11.7 million. There can be no assurance that
we will not have losses in future operating periods. Due to general economic conditions and slowdowns in purchases of networking equipment, it has become increasingly difficult for us to predict the
purchasing activities of our customers and we expect that our operating results will fluctuate substantially in the future; we anticipate future losses from operations. Future fluctuations in
operating results may also be caused by a number of factors, many of which are outside our control. Additional factors that could affect our future operating results include the
following:



63

---







Table of Contents



In
order to achieve and sustain profitability, we must achieve a combination of substantial revenue growth and/or a reduction in operating expenses.

If we are unable to accurately predict our future sales and to appropriately budget for our expenses, our operating results could suffer.

The rapidly changing nature of the markets in which we sell our products limit our ability to accurately forecast quarterly and annual
sales. Additionally, because many of our expenses are fixed in the short-term or are incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely
manner to offset any shortfall of sales.

Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address, including the cyclical
nature of and volatility in the semiconductor industry. As a result, the market price of our common stock may decline.

We operate primarily in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From
time to time, the semiconductor industry has experienced significant downturns. These downturns are characterized by decreases in product demand, excess customer inventories and accelerated erosion of
prices. These factors could cause substantial fluctuations in our revenue and in our results of operations. Any downturns in the semiconductor industry may be severe and prolonged and any failure of
the industry or wired and wireless communications markets to fully recover from downturns could seriously impact our revenue and harm our business, financial condition and results of operations. The
semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products. Accordingly, our operating results may vary
significantly as a result of the
general conditions in the semiconductor industry, which could cause large fluctuations in our stock price.

Additionally,
recently general worldwide economic conditions have experienced a significant downturn due to slower economic activity, an increase in bankruptcy filings, concerns about
inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the wired and
wireless communications markets, recent international conflicts and terrorist and military activity, and the impact of natural disasters and public health emergencies. These conditions make it
extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses to slow spending on our products
and services, which would delay and lengthen sales cycles. We cannot predict the timing, strength or duration of any slowdown or subsequent recovery in the worldwide economy, the semiconductor
industry or the wired and wireless communications markets. If the economy or markets in which we operate do not return to historical levels, our business, financial condition and results of operations
will likely be materially and

64

---



Table of Contents

adversely
affected. Additionally, the combination of our lengthy sales cycle coupled with challenging macroeconomic conditions could have a negative impact on the results of our operations.

The short life cycles of some of our products may leave us with obsolete or excess inventories, which could have an adverse impact on our operating profit and net income.

The life cycles of some of our products depend heavily upon the life cycles of the end products into which our products are designed.
Products with short life cycles require us to manage production and inventory levels closely. We cannot assure you that obsolete or excess inventories, which may result from unanticipated changes in
the estimated total demand for our products and/or the estimated life cycles of the end products into which our products are designed, will not result in significant charges that will negatively
affect our operating profit and net income.

We have limited control over the indirect channels of distribution we utilize, which makes it difficult to accurately forecast orders and could result in the loss of certain
sales opportunities.

Our revenues could be adversely affected if our relationships with resellers or distributors were to deteriorate or if the financial
condition of these resellers or distributors were to decline. In addition, as our business grows, there may be an increased reliance on indirect channels of distribution. There can be no assurance
that we will be successful in maintaining or expanding these indirect channels of distribution. This could result in the loss of certain sales
opportunities. Furthermore, the reliance on indirect channels of distribution may reduce visibility with respect to future business, thereby, making it more difficult to accurately forecast orders.

Order or shipment cancellations or deferrals could cause our revenue to decline or fluctuate.

We sell, and expect to continue selling, a significant number of products pursuant to purchase orders that customers may cancel or
defer on short notice without incurring a significant penalty. Cancellations or deferrals could cause us to hold excess inventory, which could adversely affect our results of operations. If a customer
cancels or defers product shipments or refuses to accept shipped products, we may incur unanticipated reductions or delays in recognizing revenue. If a customer does not pay for products in a timely
manner, we could incur significant charges against income, which could materially and adversely affect our revenue and cash flows.

Our international sales and operations subject us to risks that could adversely affect our revenue and operating results.

Sales to customers located outside the U.S. have historically accounted for a significant percentage of our revenue and we anticipate
that such sales will continue to be a significant percentage of our revenue. International sales constituted 49% and 48% of our net revenue in fiscal 2008 and 2007, respectively, and 66% for the
quarter ended June 30, 2009. Development and customer support operations located outside the U.S. have historically accounted for a significant percentage of our operating expenses and we
anticipate that such operations will continue to be a significant percentage of our expenses. International sales and operations involve a variety of risks and uncertainties, including risks related
to:



65

---



Table of Contents



Failure
to successfully address these risks and uncertainties could adversely affect our international sales, which could in turn, have a material and adverse effect on our results of
operations and financial condition.

Risks Relating to Our Business

If we are unable to develop and introduce new products successfully or to achieve market acceptance of our new products, our revenues, and operating income will be adversely
affected.

Our future success will depend on our ability to develop new, high-performance ICs for existing and new markets, the
cost-effective and timely introduction of such products, and our ability to convince leading communications equipment manufacturers to select these products. Our financial results in the
past have been, and are expected in the future to continue to be, dependent on the introduction of a relatively small number of new products and the timely completion and delivery of those products to
customers. The development of new ICs is highly complex, and from time to time, we have experienced delays in completing the development and introduction of new products. Our ability to develop and
deliver new products successfully will depend on various factors, including our ability to:



If
we are not able to develop and introduce new products successfully, our revenues and operating income will be materially and adversely affected. In particular, our revenue growth and
profitability could be impacted by substantial delays in introducing new products. Our success will also depend on the ability of our customers to successfully develop new products and enhance
existing products for the Carrier and Enterprise Networking and Storage markets. These markets may not develop in the manner or in the time periods that our customers anticipate. If they do not, or if
our customers' products do not gain widespread acceptance in these markets, our revenues and operating income may be materially and adversely affected.

Demand for our products may be negatively affected if our expectations regarding market demand for particular products are not accurate.

Product introductions as well as future roadmap products are based on our expectations regarding market demand and direction. If our
expectations regarding market demand and direction are incorrect, the rate of development or acceptance of our current and next-generation solutions do not meet market demand and customer
expectation, the sales of our legacy or current Carrier and Enterprise Networking and Storage Products decline more rapidly than we anticipate, or if the rate of

66

---



Table of Contents

decline
continues to exceed the rate of growth of our new products, it could negatively affect demand for our products, consolidated revenues, and profitability.

We are dependent on a small number of customers in a few industries for a significant amount of revenues. A decrease in sales to or the loss of, one or more significant
customers could adversely impact our revenues and results of operations.

We focus our sales efforts on a small number of customers in the Carrier and Enterprise Networking and Storage markets that require
high-performance ICs and
intend to continue doing so in the future. Some of these customers are also our competitors. If any of our major customers were to delay orders of our products or stop buying our products, our
business and financial condition would be severely affected. Additionally, if any of our customers are impacted by consolidation, experience financial difficulty including filing for bankruptcy
protection, or are impacted by adverse economic conditions that would delay networking infrastructure upgrades, build-outs or new installations, this could also result in increased
competition for our products and downward pressure on the pricing for our products.

Defects, errors, or failures in our products could result in higher costs than we expect and could harm our reputation and adversely affect our revenues and level of
customer satisfaction.

Due to the highly complex nature of our products, on occasion an undetected defect, error, or failure may occur when one of our
products is deployed in the field. The occurrence of defects, errors, or failures in our products could result in cancellation of orders, product returns, and the loss of, or delay in, market
acceptance of our IC solutions. Our customers could, in turn, bring legal actions against us, resulting in the diversion of our resources, legal expenses and judgments, fines or other penalties, or
losses. Any of these occurrences could adversely affect our business, results of operations, and financial condition.

We depend on third-party wafer foundries and other suppliers and subcontract manufacturers to manufacture substantially all of our current products and any delays in
materials, packaging, or manufacturing capacity or failure to meet quality control requirements could have material adverse effects on our customer relationships, revenues, and cash flows.

Wafer fabrication for our products is outsourced to third-party silicon wafer foundry subcontractors such as Taiwan Semiconductor
Manufacturing Corporation ("TSMC"), Chartered Semiconductor Manufacturing, IBM, LSI Logic and United Microelectronics Corporation. As a result, we depend on third-party wafer foundries to allocate a
portion of their manufacturing capacity sufficient to meet our needs and to produce products of acceptable quality in a timely manner. There are significant risks associated with our reliance on
third-party foundries, including:



These
and other risks associated with our reliance on third-party wafer foundries could materially and adversely affect our revenues, cash flows, and relationships with our customers.
For example, the third-party foundries that manufacture our wafers have from time to time experienced manufacturing defects and reductions in manufacturing yields. In addition, disruptions and
shortages in wafer foundry capacity may impair our ability to meet our customers' needs and negatively impact our operating results. Our third-party wafer foundries fabricate products for other
companies and, in certain cases, manufacture products of their own design. Historically, there have been periods in which there has

67

---



Table of Contents

been
a worldwide shortage of wafer foundry capacity for the production of high-performance integrated circuits such as ours. Instead of having long-term agreements with any of
our third-party foundries, we instead subcontract our manufacturing requirements on a purchase order basis. As a result, it is possible that the capacity we will need in the future may not be
available to us on acceptable terms, if at all.

In
addition to third-party wafer foundries, we also depend on third-party subcontractors in Asia and the United States for the assembly, and in some cases, wafer probe and package
testing of our products. As with our wafer foundries, any difficulty in obtaining parts or services from these subcontractors could affect our ability to meet scheduled product deliveries to
customers, which, could in turn, have a materially adverse effect on our customer relationships, revenues, and cash flows. These third-party subcontractors purchase materials used in the assembly
process based on our forecast. In the event we fail to meet our obligations by placing purchase orders that are inconsistent with our forecast, we may be required to pay compensation for material
forecasted, but not ordered. This may have an adverse effect on revenues, operating results, and cash flows.

Finally,
we are subject to occasional end-of-life ("EOL") notices on certain material and/or products that may impact our ability to continue to
support certain products. This may impact our ability to continue to support certain products, forcing us to EOL our products if we cannot obtain a replacement source of material. This may impact
revenue and/or require us to incur additional costs to provide alternative sources for these materials.

If we do not achieve satisfactory manufacturing yields or quality, our business will be harmed because of increases in our business expenses.

The fabrication of ICs is a highly-complex and technically-demanding process. Defects in designs, problems associated with transitions
to newer manufacturing processes, and the inadvertent use of defective or contaminated materials can result in unacceptable manufacturing yields and performance. These problems are frequently
difficult to detect in the early stages of the production process and can be time consuming and expensive to correct once detected. Even though we procure substantially all of our wafers from
third-party foundries, we may be responsible for low yields when these wafers are tested against our quality control standards.

In
the past, we have experienced difficulties in achieving acceptable probe and/or final test yields on some of our products, particularly with new products, which frequently involve new
manufacturing processes and smaller geometry features than previous generations. Maintaining high numbers of good die per wafer is critical to our operating results, as decreased yields can result in
higher unit costs, shipment delays, and increased expenses associated with resolving yield problems. Because we also use estimated yields to value work-in-process inventory,
yields below our estimates may require us to increase the value of inventory and related reserves reflected on our financial statements. In addition, defects in our existing or new products may
require us to incur significant warranty, support and repair costs, and could divert the attention of our engineering personnel away from the development of new products. As a result, poor
manufacturing yields, defects or other performance problems with our products could adversely affect our ability to provide competitively priced products.

We must attract and retain key employees in a highly competitive environment.

Our success depends in part upon our ability to retain key employees. In some of the fields in which we operate, there are only a
limited number of people in the job market who possess the requisite skills. We have experienced difficulty in hiring and retaining sufficient numbers of qualified engineers in parts of our business.
The loss of services of any key personnel or the inability to hire new personnel with the requisite skills could restrict our ability to develop new products or enhance existing products in a timely
matter, to sell products to customers, or to manage our business effectively.

68

---



Table of Contents

On
June 28, 2006, the Company's common stock was delisted from the NASDAQ National Market. Until recently, except for certain, very limited circumstances, the Company has not
granted stock options to newly hired or current employees. On October 13, 2008, we granted stock options and restricted stock units to current employees. Since our competitors utilize stock
option grants as a significant employee benefit, our inability to offer stock options has hindered our efforts to attract and retain key employees.

We face significant emerging and existing competition and, therefore, may not be able to maintain our market share or may be negatively impacted by competitive pricing
practices.

The markets for our products are intensely competitive and subject to rapid technological advancement in design technology,
wafer-manufacturing techniques, and alternative networking technologies. We must identify and capture future market opportunities to offset the rapid price erosion that characterizes our industry. We
may not be able to develop new products at competitive pricing and performance levels. Even if we are able to do so, we may not complete a new product and introduce it to market in a timely manner.

We
typically face competition at the design stage, where customers evaluate alternative design approaches that require ICs. Our competitors have increasingly frequent opportunities to
supplant our products in next-generation systems because of shortened product life and design cycles in many of our customers' products.

Competition
is particularly strong in the market for communications ICs, in part, due to the market's historical growth rate, which attracts larger competitors, and in part, to the
number of smaller companies focused on this area. Larger competitors in our market have acquired both mature and early stage companies with advanced technologies. These acquisitions could enhance the
ability of larger competitors to obtain new business that we might have otherwise won.

Our
customers may substitute use of our products in their next-generation equipment with those of current or future competitors. In the communications market, which includes
our Carrier and Enterprise Network markets, our competitors include Applied Micro Circuits Corporation, Broadcom Corporation, Marvell Technology Group Ltd., Maxim Integrated
Products, Inc., Mindspeed Technologies, Inc., and PMC-Sierra, Inc. Over the next few years, we expect additional competitors, some of which may have greater financial
and other resources, to enter the market with new products. In addition, we are aware of smaller privately-held companies that focus on specific portions of our range of products. These
companies, individually and collectively, represent future competition during the design stage and in subsequent product sales.

We must keep pace with rapid technological change and evolving industry standards in order to grow our revenues and our business.

We sell products in markets that are characterized by rapid changes in both product and process technologies, including evolving
industry standards, frequent new product introductions, short product life cycles, and increasing demand for higher-levels of integration and smaller process geometries. We believe that our success,
to a large extent, depends on our ability to adapt to these changes, to continue to improve our product technologies, and to develop new products and technologies to maintain our competitive position.
Our failure to accomplish any of the above could have a negative impact on our business and financial results. If new industry standards emerge, our products or our customers' products could become
unmarketable or obsolete, and we could lose market share. We may also have to incur substantial unanticipated costs to comply with these new standards.

Development
costs for new product technologies continue to increase. We may incur substantially higher R&D costs for next-generation products, as these products are typically
more complex and must be implemented in more advanced wafer fabrication processes and assembly technologies.

69

---



Table of Contents

Our business is subject to environmental regulations that could increase our operating expenses.

We are subject to a variety of federal, state, and local environmental regulations relating to the use, storage, discharge, and
disposal of toxic, volatile, and other hazardous chemicals used in our designing and manufacturing processes. In some circumstances, these regulations may require us to fund remedial action regardless
of fault. Consequently, it is often difficult to estimate the future impact of environmental matters, including the potential liabilities associated with chemicals used in our designing and
manufacturing processes. If we fail to comply with these regulations, we could be subject to fines or be required to suspend or cease our operations. In addition, these regulations may restrict our
ability to expand operations at our present locations in the United States and worldwide or require us to incur significant compliance-related expenses.

If we are not successful in protecting our intellectual property rights, it may harm our ability to compete or maintain market share.

We rely on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other
methods, to protect our proprietary technologies and processes. For example, we enter into confidentiality agreements with our employees, consultants, and business partners, and control access to and
distribution of our proprietary information. As of June 30, 2009, we had 88 U.S. patents and 14 foreign patents for various aspects of design and process innovations and have a number of
pending U.S. and foreign patent applications.

However,
despite our efforts to protect our intellectual property, we cannot assure you that:



A
failure by us to meaningfully protect our intellectual property could have a materially adverse effect on our business, financial condition, operating results, and ability to compete,
including maintaining our competitive position in the market. In addition, effective patent, copyright, trademark, and trade secret
protection may be unavailable or limited in certain countries. We have begun to find opportunities to license our intellectual property. While this may provide a substantial business opportunity for
us, it may also increase the potential for others to misappropriate or infringe upon our intellectual property.

We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could result in significant
expense and loss of our proprietary rights.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. As is common in the
industry, from time to time, third parties have asserted patent, copyright, trademark, and other intellectual property rights to technologies that are important to our business and have demanded that
we license their patents and technology. To date, none of these claims has resulted in the commencement of any litigation against us, nor have we believed that it is necessary to license any of the
rights referred to in such claims. We expect, however, that we will continue to receive such claims in the future, and any litigation to determine their validity, regardless of their merit or
resolution, could be costly and divert the efforts and attention of our management and technical personnel. We have begun to find opportunities to license our intellectual property. While this

70

---



Table of Contents

may
provide a substantial business opportunity for the Company, it may also increase the potential for others to initiate claims against us. We cannot assure that we would prevail in such disputes
given the complex technical issues and inherent uncertainties in intellectual property litigation. If such litigation were to result in an adverse ruling we could be required
to:



We have a shareholder rights plan designed to discourage hostile takeovers that may prevent shareholders from realizing a takeover premium on their shares of Vitesse common
stock.

Vitesse has a shareholder rights plan intended to preserve the long-term value of Vitesse to our shareholders by
discouraging a hostile takeover. Under the shareholder rights plan, each outstanding share of our common stock has an associated preferred stock purchase right. The rights are exercisable only if a
person or group acquires 15% or more of our outstanding common stock. The dilutive effect of the rights on the acquiring person or group is intended to encourage such person or group to negotiate with
our Board of Directors prior to attempting a takeover. If our Board of Directors believes a proposed acquisition of Vitesse is in the best interests of Vitesse and its shareholders, our Board of
Directors may amend the shareowner rights plan or redeem the rights for a nominal amount in order to permit the acquisition to be completed without interference from the plan. However, by discouraging
hostile takeovers the shareholder rights plan may prevent shareholders from realizing a takeover premium on their shares of Vitesse common stock.

Risks Relating to our Current and Prior Financial Statements and Related Matters

We have material weaknesses in our internal control over financial reporting and cannot provide assurance that additional material weaknesses will not be identified in the
future. If our internal control over financial reporting or disclosure control and procedures are not effective, there may be errors in our financial statements that could require a restatement or our
filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

Management's evaluation of the design and operating effectiveness of our internal control over financial reporting identified material
weaknesses resulting from design and operating deficiencies in the internal control system, including that we did not maintain: (i) an effective control environment, which includes controls
over the administration of and accounting for stock options and access to our information systems, as well as adequate segregation of duties; or (ii) effective controls over the
period-end process, including the review, supervision, and monitoring of the preparation of journal entries and account reconciliations, as well as the accounting for inventory, revenue
recognition and payroll.

Commencing
in mid-2006, in order to rectify these weaknesses the Company began: (i) hiring more experienced and senior finance and legal personnel;
(ii) developing additional financial policies and procedures; (iii) establishing processes and procedures to increase communications between the financial reporting, accounting functions
and senior management; and (iv) instituting a formal Code of Business Conduct and Ethics and whistle-blower policy.

In
addition, the Company has implemented, or is currently implementing the following:



71

---



Table of Contents



While
we are committed to the changes made to our internal control over financial reporting, and believe we have made progress towards resolving our material weaknesses, until sufficient
time has passed as to evaluate the effectiveness of the modifications of our internal control over financial reporting, we cannot assure you that there will not be errors in our financial statements
that could require a restatement or delay in filings, and as a result investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

We and our employees face potential federal tax and other liabilities in connection with our past option grant practices.

In reviewing past stock option grants, Vitesse determined that various stock options were granted with exercise prices that were less
than the fair market value of Vitesse's common stock on the date of grant. These grants raise potential tax issues involving Code Sections 162(m) and 409A as well as income tax and employment
tax withholding obligations. The issue was voluntarily disclosed to the IRS. In December 2008, we completed a tender offer in accordance with Code Sections 162(m) and 409A, to remediate a
portion of the federal tax liabilities. The parties are in the process of working out resolutions to the remaining issues. On June 29, 2009, the Company obtained final determination from the
Internal Revenue Service ("IRS") covering a settlement of payroll taxes, penalties and interest related to the exercise of backdated stock options during the calendar years 2004 through 2006. The
Company agreed to pay approximately $900,000 in full satisfaction of the federal income tax liabilities and remitted payment in July 2009.

We have not been able to restate or provide our financial statements for periods prior to September 30, 2005, which limits the ability to evaluate our historical
financial performance to estimate future performance.

In April 2006, we announced that our then published financial statements should no longer be relied upon. The investigation determined
that members of our former senior management backdated and manipulated the grant date of options over a number of years and subsequently attempted to create and alter documents in order to conceal
these practices. The investigation also found evidence of a number of improper accounting practices. As a result of these improper accounting practices and evaluation of the financial records and
controls in place prior to September 30, 2005, current management concluded that it cannot rely on historical balances or on the testing performed by its former auditors, supporting accounting
documents are poor and do not exist for many transactions, and key internal accounting controls were overridden by prior management or did not exist. As a result, current management has been unable to
prepare any financial statements for any period prior to September 30, 2005. Thus, there is limited historical financial information on which investors can rely upon while evaluating our
financial performance.

We are not eligible to use the "short form" registration statement on Form S-3, which could increase the cost of raising capital through the issuance and
sale of our equity or debt.

We have not been both current and timely, for a period of 12 months, with respect to our Exchange Act reporting obligations.
Until such time, we are ineligible to use the "short form" registration statement on Form S-3. Our inability to use Form S-3 could increase the cost of raising

72

---



Table of Contents

capital
through the issuance and sale of our equity or debt and the terms of any offering transaction may not be as favorable as they would have been if were eligible to use
Form S-3.

The market price for our common stock has been volatile due, in part, to our delisting from the NASDAQ National Market in June 2006 and future volatility could cause the
value of investments in our Company to fluctuate.

As a result of our failure to comply fully with our reporting requirements under the Exchange Act, our common stock has been delisted
from the NASDAQ National Market. We currently are quoted under the symbol VTSS.PK on the Pink Sheets, an electronic quotation service for securities traded over-the-counter. As
a result, there may be significantly less liquidity in the market for our common stock. In addition, our ability to raise additional capital through equity financing, and attract and retain personnel
by means of equity compensation, may be impaired. Furthermore, we may experience decreases in institutional and other investor demand, analyst coverage, market-making activity, and information
available concerning trading prices and volume, and fewer broker-dealers may be willing to execute trades with respect to our common stock. The delisting has decreased the attractiveness of our common
stock and caused the trading volume of our common stock to decline significantly, which has resulted in a significant decline in the market price of our common stock.

We
intend to seek to be relisted on a securities exchange in the future. There can be no assurance whether we will satisfy the standards for listing on an exchange or that an exchange
will approve our listing. Nor can there be any assurance, at this time, when a relisting would occur. Continuing to be quoted only on Pink Sheets could result in continued volatility in the trading
price of our common stock and could cause its value to fluctuate.

A
change of control could result in a limitation on the use of our net operating loss carryforwards.

At
October 1, 2008, we had net deferred tax assets of $441.5 million before considering the effect of the valuation allowance. These deferred tax assets are primarily
composed of net operating loss ("NOL") carryforwards. Under Section 382 of the Internal Revenue Code of 1986, as amended, if we undergo an "ownership change" the amount of our
pre-change operating losses that may be utilized to offset future taxable income will be subject to an annual limitation. An ownership change occurs if the percentage of stock of the
Company that is owned by certain groups of less than 5% shareholders, all treated as a single shareholder for this purpose, increases by more than 50 percentage points over a three year period.
The annual limitation may be increased in the event that we have overall "built-in" gains in our assets at the time of the ownership change.

Accordingly,
we have not presented any amount as an uncertain tax position under FIN 48. Any carryforwards that will expire prior to utilization will be removed from the deferred
tax assets with a corresponding reduction in the valuation allowance.

ITEM 2.    UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE BY SHAREHOLDERS

None.

ITEM 5.    OTHER INFORMATION

None.

73

---



Table of Contents

ITEM 6.    EXHIBITS

EXHIBITS

2.1

Purchase and Sale Letter Agreement, dated October 29, 2007 between the Company and Maxim Integrated Products, Inc. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed
August 29, 2007).3.1

Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2000 filed May 5,
2000).3.2

Bylaws. (Incorporated by reference to Exhibit 3.2 to the Company's current report on Form 8-K filed on December 2, 2004).4.1

Specimen of Registrant's Common Stock Certificate. (Incorporated by reference to the Company's Registration Statement on Form S-1 (File no. 33-43548), effective December 10, 1991 filed October 25,
1991).4.2

Rights Agreement dated as of March 3, 2003 between Vitesse Semiconductor Corporation and EquiServe Trust Company, N.A., as Rights Agent. (Incorporated by reference to Exhibit 1 to the Form 8-A12(g)
filed March 5, 2003).4.3

Warrant Registration Rights Agreement, dated January 25, 2007. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed January 31, 2007).4.4

Indenture between Vitesse Semiconductor Corporation and U.S. Bank National Association, as Trustee (including form of 1.50% Convertible Subordinated Debentures due 2024), dated as of September 22, 2004.
(Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed September 23, 2004).4.5

First Supplemental Indenture, dated November 3, 2006 between the Company and U.S. Bank National Assoc. as Trustee. (Incorporated by reference to Exhibit 99 to the Company's Form 8-K filed
November 9, 2006).4.6

Second Supplemental Indenture, dated September 24, 2007 between the Company and U.S. Bank National Association. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed
September 27, 2007).4.7

Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan as of September 15, 2008. (Incorporated by reference to Exhibit 4.3 to the Company's Form S-8 filed December 31,
2008).4.8

Vitesse Semiconductor Corporation Fiscal Year 2008 Executive Bonus Plan, dated as of January 24, 2008 (Incorporated by reference to Exhibit 4.3 to the Company's form 10-K/A filed January 28, 2009)
(portions of this exhibit have been omitted pursuant to a request for confidential treatment).4.9

Vitesse Semiconductor Corporation Fiscal Year 2009 Executive Bonus Plan, dated as of January 16, 2009 (Incorporated by reference to Exhibit 4.9 to the Company's form 10-Q filed February 17, 2009)
(portions of this exhibit have been omitted pursuant to a request for confidential treatment).10.1

Letter Agreement between the Company and Michael Green dated January 2, 2007. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed January 31, 2007).


74

---



Table of Contents

10.2

Employment Agreement between the Company and Richard Yonker dated February 20, 2009. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed February 26, 2009).10.3

Amended and Restated Employment Agreement between the Company and Christopher Gardner dated February 25, 2009. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed February 26,
 2009).10.4

Letter Agreement, dated October 26, 2007 between the Company and Dr. Martin C. Nuss (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed November 20, 2007).10.5

Change in Control Agreement between the Company and Michael Green dated February 25, 2009. (Incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed February 26, 2009).10.6

Loan Agreement, dated August 23, 2007 between the Company and Whitebox VSC, Ltd. (Incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed August 29, 2007).10.7

Senior Unsecured Convertible Note Purchase Agreement, dated August 23, 2007 between the Company and Whitebox VSC, Ltd. (Incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed
August 29, 2007).10.8

Term Note, dated October 29, 2007 between the Company and Whitebox VSC, Ltd. for $30 million. (Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed October 31,
2007).10.9

Form of Indemnity Agreement between the directors and the Company. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed August 22, 2007).10.10

Intellectual Property, Assignment and License Agreement, dated October 29, 2007 between the Company and Maxim Integrated Products, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K filed October 31, 2007).10.11
*
Sale and Purchase Agreement, dated June 30, 2009, between the Company and a third-party purchaser (portions of this exhibit have been omitted pursuant to a request for confidential treatment).31.1
*
Rule13a-14(a) / 302 SOX Certification of Chief Executive Officer.31.2
*
Rule13a-14(a) / 302 SOX Certification of Chief Financial Officer.32.1
*
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.


---

75

---





Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

August 10, 2009

VITESSE SEMICONDUCTOR CORPORATIONBy:

/s/ CHRISTOPHER R. GARDNER Christopher R. Gardner Chief Executive OfficerAugust 10, 2009

VITESSE SEMICONDUCTOR CORPORATIONBy:

/s/ RICHARD C. YONKER Richard C. Yonker Chief Financial Officer
(Principal Financial and Accounting Officer)


76

---